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UNIT V

FINANCIAL ACCOUNTING – II

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CAPITAL & REVENUE ITEMS IN FINAL ACCOUNTS

The expenditure of the firm has been divided into Capital expenditure & Revenue expenditure.

Items of Revenue expenditure are taken in trading account & Profit & Loss account.

Items of Capital expenditure are considered in Balance Sheet

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Capital Expenditure is an “Expenditure intended to benefit future periods in contrast to the Revenue expenditure, which benefits the current period”.

The transactions of Capital expenditure give benefits for more than one accounting period such as acquisition and improvements of assets.

Capital expenditure is non recurring in nature.

CAPITAL EXPENDITURE

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REVENUE EXPENDITURE

“In Accounting revenue expenditure is synonymous with expenses”.

It is incurred for generating revenue in the current accounting period & its benefits expires within such period.

Revenue expenditure is recurring in nature.

Examples of Revenue expenditure:

Production expenses, selling expenses, financial expenses etc.

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DEFERRED REVENUE EXPENDITURE

It is a peculiar type of Revenue Expenditure that spreads more than one accounting periods.

Example of deferred Revenue expenditure: advertisement

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PREPARATION OF FINAL ACCOUNTS

Preparation of final accounts involves following three steps

Trading Account
Profit & Loss Account &
Balance Sheet

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TRADING ACCOUNT

Trading account is prepared at the end of each accounting period to assess the Gross Profit / Loss.
Gross Profit = Net sales – COGS
Gross Loss = COGS – Net sales
Net sales = sales – sales returns
COGS or cost of production or cost of goods sold = opening stock + purchases + direct expenses – closing stock

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Direct expenses:

The following are direct expenses

carriage inwards
wages
cartage or freight
import duty
excise duty
coal, fuel, power
factory expense,
manufacturing expenses

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PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To opening stock To purchases xxxx Less: returns xx To carriage inwards To wages To freight/cartage To customs duty To gas, fuel, coal To factory expenses To other man. Expenses To productive expenses To gross profit c/d (Transferred to P&L account)	Xxxx Xxxx xxxx Xxxx Xxxx Xxxx Xxxx	By sales xxxx Less: returns xxx By closing stock By goods destroyed by fire By gross loss (Transferred to P&L account)	xxxx Xxxx xxxx

TRADING ACCOUNT PROFORMA

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PROFIT & LOSS ACCOUNT

It is prepared to ascertain the Net profit/loss of the firm for the accounting period.

Net profit can be arrived by deducting the administrative expenses from the Gross profit.

By nature Profit & Loss account is a Nominal account and should not have opening & closing balances

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If the total of credit column exceeds the total of debit column the difference is called net profit, which is transferred to the capital account or added to the existing share capital while preparing the balance sheet.

Net profit will increase the capital and net loss will decrease the capital.

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Particulars	Amt	Particulars	Amt
To office salaries To rent, rates, taxes To Printing and stationery To Legal charges To Audit fee To Insurance To General expenses To Advertisements To Bad debts To Carriage outwards To Repairs To Depreciation To interest paid To Interest on capital To Interest on loans To Discount allowed To Commission To Net profit-------🡪 (transferred to capital a/c)	xxx Xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx XXXX	By gross profit b/d By Interest received By Discount received By Commission received By Income from investments By Dividend on shares By Rent received	xxx xxx xxx xxx xxx xxx xxx xxx xxx XXXX

PROFIT AND LOSS A/C OF …………………….FOR THE YEAR ENDED…………

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BALANCE SHEET

The preparation of Balance sheet is the last and third stage of Final accounts.

The balance sheet has to be prepared only after the preparation of Trading & Profit & Loss account.

Trading & Profit & Loss account are prepared for a period of time where as the Balance sheet is prepared on a particular point of time

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“Balance sheet is a Statement prepared on particular date to reflect the financial position of the firm with all the assets and liabilities of the firm”

Balance sheet is not an account but it is a final statement of the financial position of a business on a closing date.

Assets are shown on the right side, liabilities including Capital is shown on the left side of the Balance sheet.

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Liabilities	Amt	Assets	Amt
Creditors Bills payable Bank overdraft Loans Mortgage Reserve fund Capital xxxx + Additional capital xx + Interest on capital x + Net profit xxx Less Drawings xxx Interest on drawings xx Net loss xxx	xxx xxx xxx xxx xxx xxx	Cash in hand Cash at bank Bills receivable Debtors Closing stock Investments Furniture and fittings Plant & Machinery Land & Buildings Goodwill Prepaid expenses Outstanding incomes	xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx

BALANCE SHEET OF ……………………… AS ON …………………………………….

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Particulars	Debit Amount	Credit Amount
Capital Opening Stock Discount Wages Advertising Plant and machinery Sales Electricity charges Return outwards Office rent Purchases Bills Receivables Cash at bank Furniture and fittings Sundry creditors Cash in hand Rates and taxes Printing and stationery Sundry debtors Drawings General expenses Insurance	85,600 30,000 4,700 20,000 700 1,500 2,62,700 2,000 6,660 11,780 150 300 500 18,000 12,500 1,230 320 4,58,640	87,940 350 3,60,000 1,900 8,450 4,58,640

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ADJUSTMENTS

(a) Closing Stock Rs. 30,000

(b) Rates and taxes paid in advance Rs. 30.

(d) Provide for bad debts Rs.200.

The above are the balances taken on 31st December, 20022 from the books of Mr. R. Sivaji, prepare Trading and Profit & Loss account and Balance sheet.

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2. The following trial balance of Abhiram was prepared on 31st March 2006.

Prepare, Trading and Profit and Loss A/c and Balance Sheet.

Adjustments

Closing stock was valued at Rs.60,000

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Particulars	Dr.	Cr.
Capital Opening stock Debtors and creditors Machinery Cash at bank Bank overdraft Sales returns and purchase returns Trade expenses Purchases and Sales Wages Salaries Bills payable Bank deposits	10,000 8,000 20,000 2,000 4,000 12,000 26,000 10,000 12,000 6,600 1,10,600	22,000 12,000 14,000 8,000 44,000 10,600 1,10,600

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3. The following are the balances extracted from the books of Z Ltd.

On 31st December 2020:

Z’s Capital 30,000 Discount (Dr.) 1,600

Z’s drawings 5,000 Discount (Cr.) 2,000

Furniture & Fittings 2,600 Taxes and Insurance 2,000

Bank Overdraft 4,200 General expenses 4,000

Creditors 13,800 Salaries 9,000

Business Premises 20,000 Commission (Dr.) 2,200

Opening stock 22,000 Carriage inward 1,800

Debtors 18,000 Bad debts 800

Rent from tenants 1,000 Sales 1, 50,000

Purchases 1, 10,000 Sales Returns 2,000

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Adjustments:

(a) Closing stock was Rs. 20,060.

(b) Write off depreciation on Business Premises Rs. 300 Furniture & Fittings Rs. 250