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)]
