Accoutancy Class xi – Classification Of Receipts

CLASSIFICATION OF RECEIPTS

Receipts can be classified into two categories: Capital Receipts, and Revenue Receipts

(I) Capital receipts. Capital Receipts consist ofadditioiial payments made to the business either by shareholders of the company or by the proprietors ofthe business or receipts from sale of fixed assets ofa business. For example, the amount raised by the company by way of share capital isa capital receipt. Similarly, ifa flirn sells its machinery for a sum ofRs 10,000, the receipt is a capital receipt.

It should be noted that a capital receipt is different from a capital profit. Receipt denotes receiving payment in cash. Moreover, the whole of it may or may not be a capital profit. There maybe a capital loss too. For example, ifa plant costing Rs 10,000 is sold for Rs 12,000, there is a capital receipt ofRs 12,000, but there will be a capital profit of only Rs 2,000. Similarly, if the same plant had been sold only for Rs 8,000, there is a capital receipt ofRs 8,000 but there is a capital loss ofRs 2,000.

(ii) Revenue receipts. Any receipt which is not a capital receipt is a revenue receipt. In business most ofthe receipts are revenue receipts. However, a revenue receipt is also different from-n revenue profit or revenue income. Receipt denotes receiving of payment in cash. Moreover, the entire amount ofreceiptmay or may not be a revenue income. For example, if the goods costing Rs 20,000 are sold for Rs 25,000, there is a revenue receipt ofRs 25,000, hut revenue profit or income is only ofRs 5,000.

The distinction between capital and revenue is important both for income determination and taxation purposes. Various tçsts have been laid down from time to time for distinguishing between these two. Some ofthese are based on, economic considerations, some on accounting principles and some have been pronounced by the courts. However, difficulties still arise in making a clear cut distinction between these two. There have been cases which fall on the border line. In many cases, the policies ofthose incharge ofthe business will decide whether certain expenditure or income should be classified revenue or capital. However, the rules given in the preceding pages and the illustrations given in the following pages will to a great extent help a student in making a fairly reasonable distinction between capital and revenue.

define consignment account

The increasing size of the market is making more and more difficult forthe manufacturer or wholesalerto come in direct contact with customers living at far off distances. This has made imperative forhim to enter into an agreementwith areliable local trader who can sell goods on his behalf and athis (Principal) risk for an agreed amount of commission. Such a despatch of goods from one person to another person at a different place for the purpose of warehousing and ultimate sale is termed as consignment. Goods so sent are termed as ‘Goods sent on Consignment’,the sender is called”Consignor” and the recipient ‘Consignee.’

For example if A of Bombay sends 100 radio sets toBof Delhito sell on his (A’s) behalf and at his (A’s) risk, the transaction between A and B is a consignment transaction. A isthe consignor and B is the consignee.

It should be noted that in the above example, A continues to be the owner of the goods. B is simply an agent ofA. He has not purchased the goods. He has agreed to sell the goods ofA to the best of his ability and capacity. He will, therefore, be responsible to A for payment only when he has sold away the goods. Of course, he will be reimbursed by A for any expenses incurred by him in obtaining and selling the goods besides remuneration for selling the goods as per the agreed terms.

 

Fundamentals of Accounting – Accounting period concept

As a matter of fact, the income from a business enterprise can be precisely determined only at the end of its life, i.e., when the business is finally closed down. However, in order to have an idea about the progress made by the business and to take remedial measures in time, business income is determined after the expiry of a reasonable period. Such a period is termed as ‘accounting period’, The income disclosed by the Tncome Statement is the income made during the accounting period. However, this is only an interim report. The actual income earned by the business will be known only when the business is finally closed down. Thus, the measurement of accounting income is also subject to the Accounting Period Concept.

Cost Accounting Benefits

Benefits to Creditors and investors 

Creditors can ascertain the solvency and investors, the financial strength of the concern based on Cost Accounting reports.

Cost Accounting adds to stability of the organisation, which adds to confidence of the creditors

Benefits to Government 

Cost Accounting can help in assessment of excise duty, income tax. etc.

In case of essential commodities, cost records can help the government in wage fixation, sanction of quotes, ceiling on prices, etc.

Cost Accounting aids profitability, which results in greater revenues to the government.

Benefits to Society

Cost Accounting results in cost reduction, leading to lower prices to consumers

It helps in introducing new and improved processes of production and improved efficiency results in better supply.

Evaluation of Monopolistic Competition

EVALUATION OF MONOPOLISTIC COMPETITION

Merits

1. An important merit of monopolistic competition is that it is much closer to reality than several other models of market structure. Firstly, it incorporates the facts of product differentiation and selling costs. Secondly, it can be easily used for the analysis of duopoly and oligopoly.

2. Under monopolistic competition it is possible to see that even when each individual firm produces under conditions of increasing returns, not only the firm under consideration but the entire group of firms can be in equilibrium.

3. Moreover, monopolistic competition is able to show that even when each individual firm is producing under increasing returns, it still earns only normal profit in the long run.

Demerits

1. The biggest conceptual difficulty with monopolistic competition is the concept of a ‘group’ of firms. There is no standard theoretical foundation for deciding the boundaries of a group.

2. Related with the concept of a group of firms, who face the difficulty of defining the meaning of a ‘close substitute’. We are not told at what values of cross elasticity, two products become close substitutes of each other.

The theory of monopolistic competition fails to take into account the fact that the demand by final consumers is largely influenced by the retail dealers because the consumers themselves are not fully aware of the technical qualities of the product.

 

Salient features of the Monopolistic Competition

(a) The first feature of monopolistic competition, as mentioned above, is product differentiation. A buyer can get a specific type of the ‘product’ only from one final source (may be, through the dealers and sub-dealers, etc.).

(b) Product differentiation necessitates incurring of selling expenses on the part of firms under market structure of monopolistic competition.

(c) Monopolistic competition is characterised by a large number of sellers. The demand and supply conditions of these sellers are inter-dependent.However, in spite of their large number, no individual seller becomes a price taker. He has the authority to demand a price of his choice, though he also

Distinction between Profit and Loss Account and Balance Sheet

The points of distinction between Profit and Loss Accoont and Balance Sheet are:

(i) A profit and loss account shows the profit or loss made by the business during a particular period. While a balance sheet shows the financial position of the business
on a particular date.

(ii) A profit and loss account incorporates those items which are of a revenue nature while a balance sheet incorporates those items which are of a capital nature.

(iii) Of course, both profit and loss account and the balance sheet are prepared from the Trial Balance. However, the accounts transferred to the profit and loss account are  finally closed while the accounts transferred to the balance sheet represent those accounts whose balances are to be carried forward to the next year.

Depreciation Accounting – Amortization

Amortization. The process of writing off intangible assets is termed as amortization. Some intangible assets like patents, copyrights, leaseholds have a limited useful life. Hence, their cost must be written off over such period.

The American Institute of Certified Public Accountants (AICPA) has put the difference between depreciation, depletion, and amortization in the following words.

“Depreciation can be distinguished from other terms with specialised meanings used by accountants to describe assets cost allocation procedures. Depreciation is concerned with charging the cost of man made fixed assets to operations (and not with determination of asset value for the balance sheet). Depletion refers to cost allocations for natural resources such as oil and mineral deposits. Amortization relates to cost allocation for intangible assets such as patent and leaseholds. Thc use of the term depreciation should alsobe avoided in connection with the valuation prOcedures for securities and investments”.

 

Definition of Monopolistic Competition

MONOPOLISTIC COMPETITION

A monopolistic competition is defined as that market structure in which each seller produces a ‘differentiated product’. The concept of product differentiation means that the product marketed by one seller can be distinguished from the products marketed by other sellers in some form or other. Some of the important methods of product differentiation include trade marks, brand names, size, packing, or colour etc. of the item, and technical specifications, etc.

Thus, in this market structure, each seller is a monopolist of his differentiated product. The buyers can get it only from him and from none else. At the same time, however, the products offered by different sellers are close substitutes of each other. The buyers are always comparing the prices of their products together with the perceived ‘quality’ of each. In other words, there is also an intense competition between suppliers for a share in the market. For this reason, it is a market structure in which there is a competition between a group of firms while each firm is a monopolist of its own product. It is, therefore, termed as monopolistic competition. 

Definition of Monopoly

MONOPOLY

The term monopoly means a single seller. In economics, this term refers to a firm the product of which has no close substitute in the market. It is, in that sense, a single-firm industry. Moreover, irrespective of the profit income of the existing producer firm, new firms cannot enter the industry. Hurdles to their entry may be on account of various reasons. There may be legal barriers, or the producer may own a technology or a naturally occurring substance which others cannot avail of. It is also possible that the size of the market may be too small and no new firm may find it economically worthwhile to enter it.

In the absence of a substitute product, the monopolist is free to fix a price of his choice. He can refuse to sell his product for a price below the one decided by him. However, he cannot determine the demand for his product. He cannot force the buyers to buy his product at a price of his choice. A buyer will buy it only if its price does not exceed its marginal utility to him. Therefore, if the monopolist wants to increase his sales, he has to reduce theprice of his product so as to induce

Realisation Principle – Recognition at the time of sale

Recognition at the time of sale. This is the most common basis of revenue recognition. The objective of manufacturing or purchasing goods is achieved in the business when the goods are sold away. Thus, income is deemed to be realised when a sale in the ordinary course of business is effected unless the circumstances are such that collection of the sales price is not reasonably assured. From the legal point of view, the sale is taken to be completed when the ownership in goods is transferred from the seller to the buyer. It should be noted that transfer of ownership does not depend on delivery of goods or payment of the price. Both of these obligations may be performed in future also. What is necessary is that the buyer should be responsible to take delivery of the goods or make payment of the price for them. Whether, he takes delivery dfjôods or makes payment of the price now or later is immaterial. Difficulties arise in recognising revenue in case of those businesses which are engaged in providing services rather than selling of goods, e.g., public utility concerns such as Electricity Companies, Water Works, Railways, etc. In case of such businesses, the revenue should be taken to be realised when the invoicing or billing is done for furnishing of services. In other words, accrual basis is the most appropriate basis for recognition of revenue in such cases.