Wednesday, May 14, 2014

JAIIB Accounting & Finance for Bankers --(MODEL QUESTIONS and ANSWER)





QUESTIONS
:
A)   Fill in the blanks:
1. The amount which the proprietor has invested in the business
is ______________.
2. Book-keeping is an art of recording ___________ in the book of accounts.
3. ___________ is a written document in support of a transaction.
4. Accounting begins where _______ ends.
5. Liabilities refer to the ___________ obligations of a
business.
6. Owner of the business is called __________.
7. An account is a _________ of relevant business transactions
at one place relating to a person, assets, expense or revenue
named in the heading.
8. Receipt is an acknowledgement for __________.
9. Income is the difference between revenue and ________.

[Answers: 1. capital; 2. business transactions; 3. voucher; 4.bookkeeping;
5. financial; 6. Proprietor; 7. summary; 8. Cash received; 9. expense]

B) Choose the correct answer:
1. The debts owing to others by the business is known as
              a) Liabilities b) expenses c) debtors

2. Assets minus liabilities is
               a) Drawings b) capital c) credit

3. A written document in support of a transaction is called
           a) Receipt b) credit note c) voucher


4. Business transactions may be classified into
            a) Three b) two c) one
5. Purchases return means goods returned to the supplier due to
                a) Good quality b) defective quality c) super quality
6. Amount spent in order to produce and sell the goods and services is called
                             a) Expense b) income c) revenue

[Answers: 1. (a), 2. (b), 3. (c), 4. (b), 5. (b), 6. (a)]

:
C) Fill in the Blanks:
1. Stock in trade are to be recorded at cost or market price whichever
is less is based on _____________ principle.
2. The assets are recorded in books of accounts in the cost of
acquisition is based on _____________ concept.
3. The benefits to be derived from the accounting information should
exceed its cost is based on _____________ principle.
4. Transactions between owner and business are recorded separately
due to _____________ assumption.
5. Business concern must prepare financial statements at least once
in a year is based on ___________ assumption.
6. _____________ principle requires that the same accounting
methods should be followed from one accounting period to the
next.
[Answers : 1. prudence, 2. historical cost, 3. cost benefit, 4. business
entity, 5. accounting period, 6. consistency]

D) Choose the correct answer:

1. As per the business entity assumption, the business is different
from the
                 a) Owners b) banker c) government
2. Going concern assumption tell us the life of the business is
           a) very short b) very long c) none
3. Cost incurred should be matched with the revenues of the particular
period is based on
a) Matching concept b) historical cost concept
c) full disclosure concept

4. As per dual aspect concept, every business transaction has
a) three aspects b) one aspect c) two aspects
                         [Answers : 1 (a), 2. (b), 3. (a), 4. (c)]


E) Fill in the blanks:
1. The author of the famous book “Arthasastra” is __________.
2. Every business transaction reveals __________ aspects.
3. The incoming aspect of a transaction is called _________ and the
outgoing aspect of a transaction is called _________.
4. Traditional approach of accounting is also called as _________
approach.
5. The American approach is otherwise known as _________
approach.
6. Impersonal accounts are classified into _________ types.
7. Plant and machinery is an example of _________ account.
8. Capital account is an example of _________ account.
9. Commission received will be classified under _________ account.
[Answers: 1. Kautilya, 2. two, 3. debit, credit, 4. British, 5. Accounting
Equation, 6. Two, 7. Real, 8. Personal, 9. Nominal]
F) Choose the correct answer:

1. The receiving aspect in a transaction is called as
             a) debit aspect b) credit aspect c) neither of the two

2. The giving aspect in a transaction is called as
                     a) debit aspect b) credit aspect c) neither of the two

3. Murali account is an example for
                      a) personal A/c b) real A/c c) nominal A/c
4. Capital account is classified under
                        a) personal A/c b) real A/c c) nominal A/c

5. Goodwill is an example of
               a) Tangible real A/c b) intangible real A/c c) nominal A/c

6. Commission received is an example of
             a) Real A/c b) personal A/c c) nominal A/c

7. Outstanding rent A/c is an example for
          a) Nominal account b) personal account c) representative personal account

8. Nominal Account is classified under
                 a) Personal A/c b) impersonal A/c     c) neither of the two

9. Drawings account is classified under
                     a) Real A/c. b) personal A/c. c) nominal A/c.
[Answers : 1. (a), 2. (b), 3. (a), 4. (a), 5. (b), 6. (c), 7. (c),
8.(b), 9. (b)].


Classify the following items into real, personal and nominal accounts
a. Capital                                              f. State Bank of India
b. Purchases                                           g. Electricity Charges
c. Goodwill                                            h. Dividend
d. Copyright                                           i. Ramesh
e. Latha                                                   j. Outstanding rent




[Answers : Personal account – (a), (e), (f), (i), (j)
Real account – (b), (c), (d)
Nominal account – (g), (h)]

G) Fill in the Blanks :
1. The source document gives information about the nature of the
_________.
2. The accounting equation is a statement of _________ between
the debits and credits.
3. In double entry book-keeping, every transaction affects at least
two _________.
4. Assets are always equal to liabilities plus _________.
5. A transaction which increases the capital is called _________.
6. The journal is a book of _________.
7. Recording of transaction in the journal is called _________.
8. The _________ column of journal represents the place of posting
of an entry in the ledger account.
9. _________ account is debited for the amount not recovered from
the customer.
10. The assets of a business on 31st December, 2002 were worth
Rs.50,000 and its capital was Rs.35,000. Its liabilities on that
date were Rs. _________.
[Answer : 1. transactions, 2. equality, 3. accounts, 4. capital,
5. revenue or income, 6. original entry, 7. journalising,
8. L.F, 9. bad debts, 10. Rs.15,000]


H) Choose the correct answer:
1. The origin of a transaction is derived from the
a) Source document    b) Journal     c) Accounting equation

2. Which of the following is correct?
a) Capital = Assets + Liabilities   b) Capital = Assets – Liabilities  c) Assets = Liabilities – Capital

3. Amount owned by the proprietor is called
                  a) Assets b) Liabilities c) Capital


4. The Accounting Equation is connected with
                    a) Assets only     b) Liabilities only
                     c) Assets, Liabilities and capital

5. Goods sold to Srinivasan should be debited to
                        a) Cash A/c b) Srinivasan A/c. c) Sales A/c.

6. Purchased goods from Venkat for cash should be credited to
                         a) Venkat A/c b) Cash A/c c) Purchases A/c

7. Withdrawals of cash from bank by the proprietor for office use
should be credited to
                         a) Drawings A/c b) Bank A/c c) Cash A/c

8. Purchased goods from Murthy on credit should be credited to
                          a) Murthy A/c b) Cash A/c c) Purchases A/c

9. An entry is passed in the beginning of each current year is called
                    a) Original entry b) Final entry c) Opening entry

10. The liabilities of a business are Rs.30,000; the capital of the
proprietor is Rs.70,000. The total assets are:
                            a) Rs.70,000 b) Rs.1,00,000 c) Rs.40,000

[Answers : 1. (a), 2. (b), 3. (c), 4. (c), 5. (b), 6. (b), 7. (b), 8. (a),
9.(c), 10 (b)]

I)   Problems:
1. On 31st December 2003, the total assets and liabilities were
Rs.1,00,000 and Rs.30,000 respectively. Calculate capital.

2. Indicate how assets, liabilities and capital are affected by each of
the following transactions with an accounting equation:
i. Purchase of machinery for cash Rs. 3,00,000.
ii. Receipt of cash from a debtor Rs. 50,000.
iii. Cash payment of a creditor Rs.30,000.
3. Give transactions with imaginary figures involving the following:

i. Increase in assets and capital,
ii. Increase and decrease in assets,
iii. Increase in an asset and a liability,
iv. Decrease of an asset and owner’s capital.

4. Supply the missing amounts on the basis of Accounting Equation
Assets = Liabilities + Capital
Assets = Liabilities + Capital
i. 20,000 = 15,000 + ?
ii. ? = 5,000 + 10,000
iii. 10,000 = ? + 8,000

5. State the nature of account and show which account will be debited
and which account will be credited?

1. Rent received
2. Building purchased
3. Machinery sold
4. Discount allowed
5. Discount received

J) Correct the following entries wherever you think:
i. Brought capital in to business:
                Capital A/c Dr.
                     To Cash A/c
ii. Cash Purchases:
               Cash A/c Dr.
                    To Sales A/c
iii. Salaries paid to clerk Mr.Kanniyappan:
                 Salaries A/c Dr.
                        To Kanniyappan A/c


iv. Paid carriage:
                     Carriage A/c Dr.
                         To Cash A/c
7. What do the following Journal Entries mean?
                        i. Cash A/c Dr.
                                 To Furniture A/c
                      ii. Rent A/c Dr.
                         To Cash A/c
                  iii. Bank A/c Dr.
                       To Cash A/c
                  iv. Tamilselvi A/c Dr.
                            To Sales A/c
8. Show the accounting equation on the basis of the following
transactions.
Rs.
i. Ramya started business with cash 25,000
ii. Purchased goods from Shobana 20,000
iii. Sold goods to Amala costing Rs.18,000 25,000
iv. Ramya withdrew from business 5,000
[Assets Rs. 47,000 = Capital Rs.27,000 + Liabilities Rs.20,000

K) Fill in the blanks:
1. Ledger is the _________ book of account.
2. The process of transferring entries from Journal to the Ledger
is called _________.
3. c/d means _________ and b/d means _________.
4. c/f means _________ and b/f means _________.
5. Debiting an account signifies recording the transactions on the
_________ side.
6. The left hand side of an account is known as _________and
the right hand side as _________.
7. Credit Balance means _________ is heavier than _________.
8. Real accounts cannot have _________ balance.
9. Account having debit balance is closed by writing _________.
10. L.F. column in the journal is filled at the time of _________ .

[Answers: 1. principal, 2. posting, 3. carried down; brought down,
4. carried forward; brought forward, 5. debit side, 6. debit
side; credit side, 7. credit total; debit total, 8. credit, 9. By
Balance c/d, 10. posting]
L) Choose the correct answer :
1. Ledger is a book of :
         a. original entry    b. final entry    c. all cash transactions.

2. Personal and real accounts are:
    a. closed b. balanced  c. closed and transferred

3. The column of ledger which links the entry with journal is
      a. L.F column b. J.F column  c. Particulars column

4. Posting on the credit side of an account is written as
         a. To      b. By     c. Being

5. Nominal account having credit balance represents
           a. income / gain b. expenses / losses    c. assets

6. Nominal account having debit balance represents
         a. income / gain b. expenses / losses  c. liability

7. Real accounts always show
          a. debit balances b. credit balances  c. nil balance.

8. Account having credit balance is closed by writing
         a. To Balance b/d b. By Balance c/d  c. To Balance c/d

9. When the total of debits and credits are equal, it represents
                a. debit balance b. credit balance  c. nil balance

10. The balances of personal and real accounts are shown in the
     a. profit and loss account     b. balance sheet      c. both.

[Answers: 1 (b), 2. (b), 3. (b), 4. (b), 5. (a), 6. (b), 7. (a), 8. (c), 9. (c),
10. (b)]






Kinds of Subsidiary Books
The number of subsidiary books may vary according to the Requirements of each business. The following are the special purpose Subsidiary books.
Transactions
Day Books Bills Books Cash Book Journal Proper Purchases Book Sales Book Purchases Return Book Sales Return Book Bills Receivable Bills Book Payable Book



Purpose
i. Purchases Book records only credit purchases of goods by the trader.
ii. Sales Book is meant for entering only credit sales of goods by the trader.
iii. Purchases Return Book records the goods returned by the trader to suppliers.
iv. Sales Return Book deals with goods returned (out of previous sales) by the customers.
v. Bills Receivable Book records the receipts of bills (Bills Receivable).
vi. Bills Payable Book records the issue of bills (Bills Payable).
vii.Cash Book is used for recording only cash transactions i.e., receipts and payments of cash.
viii. Journal Proper is the journal which records the entries which cannot be entered in any of the above listed subsidiary


I. Objective Type:
a) Fill in the blanks:
1. Sub division of the journals into various books for recording
transactions of similar nature are called ________.

2. The total of the ________ book is posted to the debit of
Purchases account.

3. The person who prepares a bill is called the ________.

4. Days of grace are ________ in number.

[Answers: 1. subsidiary books, 2. purchases, 3. drawer, 4. three]

b) Choose the correct answer :
1. Purchase of machinery is recorded in
                    a) sales book b) journal proper c) purchases book
2. Purchases book is kept to record
              a) all purchases b) only cash purchases c) only credit purchases
3. Credit sales are recorded in
                 a) sales book b) cash book c) journal proper
4. Goods returned by customers are recorded in
             a) sales book b) sales return book c) purchases return book

5. On 1st January 2003, Chandran draws a bill on Sundar for 3
months, its due date is ____________
                 a) 31st March 2003 b) 1st April 2003 c) 4th April 2003

[Answers : 1. (b), 2. (c), 3. (a), 4. (b), 5. (c)

Kinds of Cash Book
The various kinds of cash book from the point of view of uses may be as follow:
Kinds of cash book
·         Single column cash book
·          Double column cash book with cash columns and discount columns
·         Triple column cash book With cash and bank columns and with discount
·         Petty cash book


I. Objective Type ON CASH BOOK
a) Fill in the Blanks:
1. Discount allowed column appears in _______ side of the cash book.
2. In the triple column cash book, when a cheque is received the amount is entered in the _______ column.
3. Discount received column appears in _____ side of the cash book.
4. A cheque received and paid into the bank on the same day is recorded in the ______ column of the three column cash book.
5. When a cheque received from a customer is dishonoured, his account is ________.
6. Cash Book is one of the _______ books.
[Answers : 1. debit, 2. cash, 3. credit, 4. bank, 5. debited,
6. subsidiary]
Choose the correct answer:
1. The cash book records
       a) All cash payments b) all cash receipts c) all cash receipts & payments
2. When goods are purchased for cash, the entry will be recorded
in the
                   a) Cash book b) purchases book c) journal

3. The balance of cash book indicates
          a) net income b) cash in hand c) difference between debtors and  creditors
4. In triple column cash book, cash withdrawn from bank for office
use will appear in
a) debit side of the cash book only
b) both sides of the cash book.
c) credit side of the cash book only.
5. If a cheque sent for collection is dishonoured, the debit is given
to
                  a) Suppliers A/c b) bank A/c      c) customers A/c
6. If a cheque issued by us is dishonoured the credit is given to
                       a) supplier’s A/c b) customer’s A/c  c) bank A/c
[Answers : 1 (c), 2. (a), 3. (b), 4. (b), 5. (c), 6. (a)]

 I. Objective type:
a) Fill in the blanks :
1. The book that records all small payments is called __________.
2. The person who maintains petty cash book is known as
__________.
3. Analytical petty cash book is just like the __________.
4. The periodic total of each column in the analytical petty cash
Book is posted to the concerned __________ accounts.
5. The petty cashier generally works on __________ system.
[Answers: 1. Petty cash book, 2. Petty cashier, 3. Cash book,
4. Nominal, 5. Imprest]

b) Choose the correct answer:
1. Petty cash may be used to pay
a) Salaries to staff
b) Purchase of furniture and fittings
c) Expenses relating to post and telegrams

2. The balance in the petty cash book is
a) an asset b) a liability c) an income

3. On Jan 1st 2002, Rs.1,000 given to petty cashier. He has spent
Rs.860 during the month of January. On Feb 1st to make the
imprest he will receive cheque for Rs.______.
a) Rs. 1,000 b) Rs. 860 c) Rs. 1,860

[Answer: 1.(c), 2. (a), 3 (b)]


I. Objective type bank Reconciliation
a) Fill in the blanks:
1. The bank statement is sent by __________ to the customer.
2. Overdraft means credit balance as per ________ book.
3. When cash is withdrawn from the bank, the bank ________ the
customer’s account.
4. ________ balance in pass book shows bank overdraft.
5. For the purposes of reconciliation only the ________ column of
the cash book are to be considered.
6. A bank reconciliation statement is prepared by the ________.
[Answers : 1. bank, 2. cash, 3. debits, 4. debit, 5. bank, 6. customers]

b) Choose the correct answer:
1. Bank Reconciliation statement is prepared by the
                 a) bank b) creditor of a business c) customer of a bank

2. Debit balance in the Cash Book means
a) Overdraft as per Pass Book b) credit balance as per Pass Book
c) Overdraft as per Cash Book

3. When balance as per Cash Book is the starting point, to ascertain
Balance as per pass book interest allowed by Bank is
a) Subtracted b) added c) not adjusted

4. When balance as per Cash Book is the starting point, to ascertain
the balance as per pass book interest charged by Bank is:
a)    added b) subtracted c) not adjusted
5. When the balance as per Cash Book is the starting point to ascertain
b)   balance as per pass book, direct deposits by customers are:
c)    a) added b) subtracted c) not adjusted
6. When the balance as per Cash Book is the starting point to ascertain
      balance as per pass book, direct payment by bank are:
a) added    b) subtracted    c) not adjusted
7. A bank pass book is a copy of
a) The cash column of a customer’s cash book.
b) The bank column of a customer’s cash book.
c) The customer’s account in the bank’s ledger.

8. The bank statement shows an overdrawn balance of Rs.2,000. A
cheque for Rs.500 drawn in favour of a creditor has not yet been
presented for payment. When the creditor presents the cheque
for payment, the bank balance will be
a) Rs. 1,500 b) Rs. 2,500 (overdrawn) c) Rs.2,500

[Answers : 1. (c), 2. (b), 3. (b), 4. (b), 5. (a), 6. (b), 7. (c), 8. (b)]

Problems:
1. Make a bank reconciliation statement of Mr.Udayakumar from
the following particulars.
a) Balance as per cash book Rs.1,500.
b) Cheques deposited but not cleared Rs.100.
c) Cheques issued but not presented for payment Rs.150.
d) Interest allowed by bank Rs.20.
[Answer : Balance as per pass book Rs.1,570]

2. Prepare a bank reconciliation statement of Mr.Goutham from the
following data as on 31.12.2003.
              a) Balance as per cash book 12,500
                    b) Cheques issued but not presented for payment 900
               c) Cheques deposited in bank but not collected 1,200
                   d) Bank paid insurance premium 500
              e) Direct deposit by a customer 800
                    f) Interest on investment collected by bank 200
              g) Bank charges 100
[Answer : Balance as per pass book Rs. 12,600]

Kinds of Errors
Keeping in view the nature of errors, all the errors committed in
the accounting process can be classified into two.
i. Errors of Principle and
ii. Clerical Errors
Errors of Principle
Transactions are recorded as per generally accepted accounting principles. If any of these principles is violated or ignored, errors resulting from such violation are known as errors of principle. For example,
Purchase of assets recorded in the purchases book. It is an error of principle, because the purchases book is meant for recording credit purchases of goods meant for resale and not fixed assets. A trial balance will not disclose errors of principle.
II. Clerical Errors
These errors arise because of mistakes committed in the ordinary course of accounting work. These can be further classified into three types as follows.
a) Errors of Omission
This error arises when a transaction is completely or partially omitted to be recorded in the books of accounts. Errors of omission may be classified as below.

i. Error of Complete Omission: This error arises when a transaction is totally omitted to be recorded in the books of accounts.
For example, Goods purchased from Ram completely omitted to be recorded. This error does not affect the trial balance.
ii. Error of Partial Omission: This error arises when only one aspect of the transaction either debit or credit is recorded. For example,
a credit sale of goods to Siva recorded in sales book but omitted to be posted in Siva’s account. This error affects the trial balance.
b) Errors of Commission
This error arises due to wrong recording, wrong posting, wrong casting, wrong balancing, wrong carrying forward etc. Errors of
commission may be classified as follows:
i. Error of Recording: This error arises when a transaction is wrongly recorded in the books of original entry. For example, Goods of Rs.5,000, purchased on credit from Viji, is recorded in the book for Rs.5,500. This error does not affect the trial balance.
ii. Error of Posting: This error arises when information recorded in the books of original entry are wrongly entered in the ledger. Error of posting may be

i. Right amount in the right side of wrong account.
ii. Right amount in the wrong side of correct account
iii. Wrong amount in the right side of correct account
iv. Wrong amount in the wrong side of correct account
v. Wrong amount in the wrong side of wrong account
vi. Wrong amount in the right side of wrong account, etc.
This error may or may not affect the trial balance.
iii. Error of Casting (Totalling) : This error arises when a mistake is committed while totalling the subsidiary book. For example, instead of Rs.12,000 it may be wrongly totalled as Rs.13,000. This is called overcasting. If it is wrongly totalled as Rs.11,000, it is called undercasting.

I. Objective Type  on ERROR
a) Fill in the blanks:
1. Trial Balance should be tallied by following the rules of _______.
2. If the total debits exceeds the total credits of trial balance, suspense account will show _______ balance.
3. Suspense account having debit balance will be shown on the _______ side of balance sheet.
4. If the total debit balances of the trial balance exceeds the total credit balances, the difference is transferred to the _______ side of the suspense account.
5. Suspense account having credit balance will be shown on the _______ side of the balance sheet.
6. Short credit of an account decreases the _______ column of the trial balance.
7. When errors are located and rectified, _______ automatically gets closed.
8. Journal entries passed to correct the errors are called _______.
9. Excess debit of an account can be rectified by _______ the same account.
10. Short debit of an account can be rectified by _______ of the same account.

[Answers : 1. double entry system, 2. credit, 3. assets, 4. credit,
5. liabilities, 6. credit, 7. suspense account, 8. rectifying
entries, 9. credit (the excess amount in), 10. further debit
(the short amount)]
b) Choose the correct answer:
1. Trial balance is prepared to find out the
a) profit or loss b) financial position   c) arithmetical accuracy of the accounts

2. Suspense account in the trial balance is entered in the
               a) Trading A/c b) Profit and loss A/c   c) Balance sheet

3. Suspense account having credit balance will be shown on the
a) Credit side of the profit and loss A/c
b) Liabilities side of the balance sheet
c) Assets side of the balance sheet

4. State which of the following errors will not be revealed by the Trial Balance.
a) Errors of complete omission.
b) Error of carrying forward.
c) Wrong totalling of the purchases book

5. Errors which affect one side of an account are called
a) Single sided errors b) Double sided errors
c) None of the above.
6. Amount spent on servicing office Typewriter should be debited
to:
                          a) Miscellaneous Expenses Account.
    b) Typewriter Account.
c) Repairs Account.
7. Wages paid to workers for the installation of a new Machinery should be debited to:
a) Wages Account
b) Machinery Account
c) Factory Expenses Account
8. Salary paid to Manager must be debited to
a) Manager’s Account
b) Office Expenses Account
c) Salary Account.
9. Goods taken by the proprietor for domestic use should be credited to

a) Proprietor’s Drawings Account.  b) Sales Account.
c) Purchases Account.

10. Cash received from Mani whose account was previously written off as a Bad Debt should be credited to:
a) Mani’s Account.
b) Miscellaneous Income Account.
c) Bad Debts Recovered Account.
[Answers: 1. (c), 2. (c), 3. (b), 4. (a), 5. (a), 6. (c), 7. (b), 8. (c),
9.(c), 10. (c)

Capital Transactions
The business transactions, which provide benefits or supply services to the business concern for more than one year or one operating cycle of the business, are known as capital transactions.


The transactions which relate to capital are again sub-divided into capital expenditure and capital receipt.
Capital Expenditure
Capital expenditure consist of those expenditures, the benefit of which is carried over to several accounting periods. In other words the benefit of which is not consumed within one accounting period. It is non-recurring in nature.

Characteristics
In other words, it refers to the expenditure, which may be
    i. purchase of a fixed asset.
ii. not acquired for sale.
           iii. it is non-recurring in nature.
                                                    iv. incurred to increase the operational efficiency of the business concern.
Examples
i. Expenses incurred in the acquisition of Land, Building, Machinery, Furniture, Car, Goodwill, Copyright, Trade Mark, Patent Right, etc.
ii. Expenses incurred for increasing the seating accommodation in a cinema hall.
iii. Expenses incurred for installation of fixed assets like wages paid for installing a plant.
iv. Expenses incurred for remodelling and reconditioning an existing asset like remodeling a building

Capital Receipt
Capital receipt is one which is invested in the business for a long period. It includes long term loans obtained from others and any amount realised on sale of fixed assets. It is generally non-recurring in nature.
Characteristics
                                         i. Amount is not received in the normal course of business.
ii. It is non-recurring in nature.
Examples
                    i. Capital introduced by the owner
ii. Borrowed loans
iii. Sale of fixed asset
 Revenue Transactions
The business transactions, which provide benefits or supplies services to a business concern for an accounting period only, are known as revenue transactions. Revenue transactions can be Revenue Expenditure or Revenue Receipt.
Revenue Expenditure
Revenue expenditures consist of those expenditures, which are incurred in the normal course of business. They are incurred in order to maintain the existing earning capacity of the business. It helps in the upkeep of fixed assets. Generally it is recurring in nature.
Characteristics
i. It helps in maintaining the earning capacity of the business concern.
ii. It is recurring in nature.

Examples
i. Cost of goods purchased for resale.
ii. Office and administrative expenses.
iii. Selling and distribution expenses.
iv. Depreciation of fixed assets, interest on borrowings etc.
v. Repairs, renewals, etc.
 Revenue Receipt
Revenue receipt is the receipt of income which is earned during the normal course of business. It is recurring in nature.

Characteristics
i. It is received in the normal course of business.
ii. It is recurring in nature.

Examples
i. Sale of goods or services.
ii. Commission and Discount received.
iii. Dividend and interest received on investments etc.

Deferred Revenue Expenditure
A heavy revenue expenditure, the benefit of which may be extended over a number of years, and not for the current year alone is called deferred revenue expenditure. For example, a new firm may advertise very heavily in the beginning to capture a position in the market. The benefit of this advertisement campaign will last for quite a few years. It will be better to write off the expenditure in three or four years and not only in the first year.

Characteristics
i. Benefit is enjoyed for more than one year
ii. It is non-recurring in nature
Examples
i. Expenses incurred on research and development
ii. Abnormal loss arising out of fire or lightning (in case the asset
has not been insured).
iii. Huge amount spent on advertisement


Capital profit and Revenue profit
In order to find out the correct profit and the true financial position, there must be a clear distinction between capital profit and revenue profit

Capital profits
Capital profit is the profit which arises not from the normal course of the business. Profit on sale of fixed asset is an example for capital profit.
Revenue profits
Revenue profit is the profit which arises from the normal course of the business. i.e, Net Profit – the excess of revenue receipts over revenue expenditures.
Capital loss and Revenue loss
In order to ascertain the loss incurred by a firm it is important to distinguish between capital losses and revenue losses.
Capital Losses
Capital losses are the losses which arise not from the normal course of business. Loss on sale of fixed asset is an example for capital loss.
Revenue Losses
Revenue losses are the losses that arise from the normal course of the business. In other words, ‘net loss’ – i.e., excess of revenue expenditures over revenue receipts

Illuatration 1:
Shyam & Co., incurred the following expenses during the year 2003.Classify the following items under capital or revenue
i. Purchase of furniture Rs.1,000.
ii. Purchase of second hand machinery Rs.4,000.
iii. Rs.50 paid for carriage on goods purchased
iv. Rs.175 paid for repairs on second hand machinery as soon as it was purchased.
v. Rs.600 wages paid for installation of plant.
Solution
i. Capital expenditure – as it results in the acquisition of fixed asset.
ii. Capital expenditure – as it results in the acquisition of fixed asset.
iii. Revenue expenditure – expenses incurred on purchases of goods for sale.
iv. Capital expenditure – as it is spent for bringing the asset into working condition.
v. Capital expenditure – as it is spent for bringing the asset into working condition.

Illustration 4
Fashion Textiles gives the following transactions of their firm during the year 2003, you are required to classify the transactions into capital or revenue.
i. Rs.2,500 spent on purchasing a tyre for their lorry.
ii. They had old machinery of value Rs.10,000 was sold for Rs.9,500.
iii. They received Rs.5000 towards dividend form their investments in shares.
iv. They were able to sell cotton ‘T’ shirts ( cost Rs. 1,200 ) for Rs.1,500.
v. Rs.600 was spent on alteration of a machinery in order to reduce power consumption.
Solution
i. Revenue expenditure – as it spent to replace a part of the lorry.
ii. Capital loss Rs.500 – as they have incurred a loss on sale of fixed asset and Rs.9,500 will be a capital receipt as it is a sale of fixed asset.
iii. Revenue receipt – earned in the ordinary course of business.
iv. Revenue receipt – Rs.300 is received in the ordinary course of business.
v. Capital expenditure – as it reduces cost of production.




I. Objective Type
a) Fill in the blanks:
1. Amount spent on acquiring a copy right is an example for _________.
2. Capital expenditure is _________ in nature.
3. Revenue transactions can be _________ or _________.

4. Depreciation on fixed asset is a _________ expenditure.
5. Expenses on research and development will be classified under
_________.
[Answers : 1. capital expenditure, 2. non-recurring, 3. revenue
expenditure, revenue receipt, 4. revenue expenditure,
5.deferred revenue expenditure.
b) Choose the correct answer:

1. Transaction which provide benefit to the business for more than one year is called as
a) capital transaction b) revenue transaction c) neither of the two.

2. Amount spent on remodelling an old car is example of
a) deferred revenue expenditure b) revenue expenditure c) capital expenditure

3. Shankar introduces Rs.50,000 as additional capital in the business. This amount will be considered as __________.
a) capital receipt b) revenue receipt c) both

4. Revenue receipts are ___________ in the business.
a) non-recurring b) recurring c) neither of the above.

5. Venkatesh purchases goods worth Rs.80,000 for the purpose of
selling. This amount will be treated as
a) capital expenditure b) revenue expenditure
c) deferred revenue expenditure

6. Expenses on advertisement will be classified under
a) capital expenditure b) revenue expenditure
c) deferred revenue expenditure

7. An plant worth Rs.8,000 is sold for 8,500 the capital receipt amounts to
a) Rs. 8,000 b) Rs. 8,500
c) Rs. 500

8. Revenue expenditure is intended to benefit.
a) subsequent year b) previous year
c) current year

9. An asset worth Rs.1,00,000 is sold for Rs.85,000 the capital loss amounts to
a) Rs. 85,000 b) Rs. 1,00,000
c) Rs. 15,000

10. The net loss which arises in a business is an example of
a) revenue loss b) capital loss c) neither of the two

[Answers : 1. (a), 2. (c), 3. (a), 4. (b), 5. (b), 6. (c), 7. (b), 8. (c),
9.(c), 10. (a)]




1. Classify the following into capital and revenue
i. Rs.560 spent on replacement of a worn our part of a plant
ii. Rs.1,500 spent on complete overhauling of a second hand machinery just bought.
iii. Carriage expenses Rs.230
iv. Profit on sale of asset Rs.700
v. Rs.250 loss on sale of furniture
[Answers : Capital expenditure – (i), (ii); Revenue expenditure – (iii);
Capital profit – (iv); Capital loss – (v)]

2. Raju gives you the following expenses which were incurred in his business during the year 2003, classify them into capital, revenue or deferred revenue

i. Rs.12,000 spent on purchasing a patent right
ii. Freight charges paid on new plant amounts to Rs.700
iii. Repairs of Rs.575 for furniture
iv. Rs.5,000 spent towards expenses connected with rain water
harvesting as per Government orders
v. Rs.7,500 spent towadrs initial advertising expenses

[Answers : Capital expenditure–(i), (ii), (iv); Revenue expenditure–
(iii); Deferred revenue expenditure – (v)]