Revenue Expenditure becoming Capital Expenditure

Revenue Expenditure becoming Capital Expenditure

Following are some of the circumstances under which an expenditure which usually’ of a revenue nature may be taken as an expenditure of a capital nature:

I. Repairs. The amount spent on repairs of plant, furniture, building, etc., is taken as a revenue expenditure. However, when some second-hand plant, motor car, etc., is purchased, the expenditure incurred for immediate repairs of such plant, motor car, etc., to make it fit for use will be taken as a capital expenditure.

2. Wages. The amount spent as wages is usually taken as a revenue expenses. However, amount of wages paid for erection of a new plant or machinery or wages paid to workmen engaged in construction of a fixed asset are taken as expenditure of a capital nature.

3. Legal charges. Legal charges are usually taken as expenditure of a revenue nature, but legal charges incurred in connection with purchase of fixed assets should be taken as a part of the cost of the fixed asset.

4. Transport charges. Transport Charges are generally of a revenue nature, but transport charges incurred for a new plant and machinery are taken as expenditure of a capital nature and are added to the cost of the asset.

5. Interest on capital. Interest on Capital paid during the construction of works or buildings or plant may be capitalised and thus added to the cost of the asset concerned.

6. Raw materials and stores. They are usually taken as of a revenue nature, but raw materials and stores consumed in construction of the fixed assets should be treated as capital expenditure and be taken as a part of the cost of such fixed asset.

Accountancy Class 11 – Types of Rectification of Errors

1. Errors of omission. These errors are incurred in those cases when a transaction

is completely omitted from the books of accounts. It happen: when a transaction is not recorded in the books of the original entry (i.e., various journals). For example, if a purchase of goods on credit from Shri Ram Lal has not at all been recorded in the books of accounts, such an error will be teimed as an error of omission. Since, there has been neither a debit entry nor a credit entry, therefore, the two sides of the TYial Balance will not be at all affected on account of this error. Such errors, therefore, cannot be located out very easily. They come to the notice of the businessman when statement of accounts are received from or sent to creditors or debtors as the case might be.

2. Errors of commission. Such errors include errors on account of wrong balancing of an account, wrong posting, wrong carry forwards, wrong totalling, etc. For example, if a sum of Ps 50 received from Mukesh is credited to his account as Rs 500, this is an error of commission. Similarly, if the total of the debit side of an account is carded forward from one page to another and the mistake is committed in such carry forward (e.g. total of Rs 996 is carried forwards as Rs 699) such an error is an error of commission. Errors of commission affect the agreement of the Trial Balance and, therefore, their location is easier.

3. Errors of principle. Errors of principle arc committed in those cases where a proper distinction between revenue and capital items is not made. i.e., a capital expenditure is taken as a revenue expenditure or vice-versa. Similarly, a capital receipt may have been taken as 1 revenue receipt or vice- versa. For example, a sale of old furniture of Rs 500 should be credited to the furniture account, but if it is credited to the Sales Account, it will be termed as an error of principle. Sale of old furniture is a capital receipt. If it is credited to Sales Account, it has been taken as a revenue receipt. Such errors by themselves do not affect the agreement of the Trial Balance. Therefore, they also are difficult to be located.

4. Compensating errors. As the name indicates, compensating errors are those errors which compensate each other. For example, if a sale of Rs 500 to Ram is debited as only of Ps 50 to his account, while a sale of Rs 50 to Shyam is debited as of Rs 500 to his account, it is a compensating error. These errors also do not affect the agreement of the ThaI Balance and, therefore, their location is also difficult.

Account Current – Computation of Interest

Computation of Interest 

Interest is usually calculated on the basis of number of days. Thus, computation of interest involves.

(1) Calculation of days.

(2) Calculation of the amount of interest..

(3) Calculation of days. Following points should be kept in mind while calculating the number of days.

(i) There are three methods for calculating the number of days:

(a) Forward method. The method is most common. The number of days are calculated from the du date of the transaction to the date of settlement. –

(b) Backward or epoque method. In case of this method the number of days are counted from the opening date (i.e., the date of commencement of the account current) of the account current to the due date of the transaction.

(c) Daily balance method. The method is used by banks. Days are calculated from the due date of a transaction to th due date of the next transaction.

(ii) The effective date of the transaction should be considered for calculating the number of days irrespective of the method followed. For example if as

Fundamentals of Accounting – Capital and Revenue Expenditure

Capital and Revenue Expenditure

Capital expenditure is the expenditure incurred for acquisition of assets the benefits of which are enjoyed over the years. The benefits of revenue expenditures are exhausted in the year of incurrence Thus it is seen that utilisation of business capital is made for two distinct purposes:

1) Expenses yielding benefits over the years termed – capital expenditure.The benefit of such expenditure lasts for a long period of time.Purchases of land, buildings, machinery, furniture, patents, etc, fees paid to lawyer for drawing a purchase deed of land, overhauling expenses of second
hand machinery, cartage paid for bringing machinery to the factory from supplier’s premises and money spent to install a machinery

2) Expenditures yielding benefits during the current accounting year – termed as revenue expenditure
Where the benefits of a revenue expenditure are extended beyond the accounting year of incurrence it is called a differed revenue expenditure.

Suppose a company incurred an expenditure of Rs. 100000 for advertisement before marketing of a new product. If the whole amount is charged in the current year, the profit of the company would not reflect a true picture as the benefits are likely to spread over three to four years. So 1/3 or 1/4 of the expenditure will be charged to current P/L Account
and the balance should be carried forward for remaining years. This will be shown on the assets side of the balance sheet as deferred revenue expenditure.

Expenses whose benefit expires within the year of expenditure and which are incurred to maintain the earning capacity of existing assets are termed as revenue expenditure. Amounts paid for wages, salary, carriage of goods, repairs, rent and interest, etc., are items of revenue expenditure. Depreciation on fîxed assets is also a revenue expenditure.

Difference Between Capital Expenditure and Revenue Expenditure

(I) Capital expenditure is incurred in acquiring or improving permanent assets which are not meant for resale. But revenue expenditure is a routine expenditure incurred in the normal course of business and includes cost of sales as also the upkeep of fixed assets etc.

(ii) Capital expenditure seeks to improve the earning capacity of the business whereas revenue expenditure is incurred to maintain the earning capacity of the business.

(iii) Capital expenditure is normally a non-recurring outlay but revenue expenditure is usually a recurring item.

Nifty Pivot Point Calculator comes under revenue expenditure, best example in the real world.

Account Current Introduction

ACCOUNT CURRENT

In case there are several transactions between two parties, it will be necessary to take into account the question of interest besides ensuring the correctness of amount due by one party to the other. It will be appropriate in such a case that each party should send a statement of account to the other party instead of settling each transaction individualty. Such a statement when rendered in the form of an account by one party to another, duly setting out in chronological order the details of the transactions together with interest, is termed as an Account Current. The main heading of the account is preceded by the name of the party to whom it is rendered and is succeeded by the name of the party sending the statement. For example, if A sends an account current to B, the heading of the account current will be:

B in account  current with A In case the account current is being sent by B to A, the heading of the account current will be A in account current with B

Account current is sent by one person to another in case of following types of relationship:

(a) Principal and Agent, (b) Consignor and Consignee, (c) Supplier of goods and Customer, (d) Co-venturers.

Joint Venture Accounting Methods

WHEN ALL VENTURERS KEEP ACCQUNTS

There are two methods of keeping books:

(i) When each party informs the other party regarding transactions made by him on accou’ht of joint venture at regular intervals.

(ii) When such information is furnished at the completion of the venture. This is popularly known as ‘memorandum method’.

1. When each Venturer gets complete infonnation from other Venturer(s). In this case each party maintains the following accounts: 

(a) Joint Venture Account. It is similar to an ordinary P. & L. A/c. It is debited with total purchases and total expenses incuned and credited with the amount of sales and stock in hand. The balance of this account is either a profit or a loss.

(b) Personal Account or Accounts of the Co’venturers. This personal account is written as “Joint Venture with… Account” The words “Joint Venture with.. axe added before the name of the Venturer, only to distinguish it from other personal accounts of the main business. It is a record of transactions made by the co-venturer on account of joint venture. The account is closed by settling the balance. 

Steps for Preparing a Bank Reconciliation Statement

(i) The cash book should be completed and the balance as per bank column on a particular date should be found out  covering the period for which the statement has to be prepared.

(ii) The bank should be requested to complete and send to the firm the bank pass book up to the date mentioned.

(iii) Check the entries of the debit and credit sides of the bank columns of the cash book with corresponding entries on the credit and debit sides of the pass book relating to the same period.

(iv) The items not tallying should be classified into common groups according to their characteristics.

(v) The balance as shown by any one book (i.e. the cash book or the bank pass book) should be taken as the base. This is, as a matter of fact, the starting point for determining the balance as shown by the other book after making suitable  adjustments taking into account the causes of difference.

(vi) The effect of the particular cause of difference on the balance shown by the other book should be noted.

(vii) In case, the cause has resulted in an increase in the balance shown by the other book, the amount of such increase should be added to the balance as per the former book which has been taken as the base.

(viii) In case, the cause has resulted in a decrease in balance shown by the other book, the amount of such decrease should be deducted from the balance as per the former book which has been taken as the base.

Partnership Accounting – Admission of Partner

ADMISSION OF PARTNER 

Section 31 of the Partnership Act deals with the statutory provision regarding admission of a new partner. These provisions are summarised below:

(a) A new partner cannot be admitted without the consent of all the partners unless otherwise agreed upon.

(b) A new partner admitted to an existing firm, is not liable to any debts of the firm incurred, before he conies in as a partner. The new partner cannot be held responsible for the acts of the old partners unless it is proved that

(i) the reconstituted firm has assumed the liability to pay the debt; and

(ii) that the creditor concerned has agreed to accept the reconstituted finn as his debtor and to discharge the old firm from liability.

However, a minor adMitted to the benefits of partnership, who, if he elects to become partner in the firm after attaining majority, shall become personally liable for all the acts of the finn done since he was admitted to the benefits of partnership.

A newly admitted partner shall be liable only for the debts incurred or transactions entered into by the fimi subsequent to his becoming a partner.

Provisions Affecting Accounting Treatment in Partnership Business

Provisions affecting accounting treatment

The partnership deed is usually very elaborate. It covers all matters affecting the partnership business. However, in the absence of any provision to the contrary in the partnership deed/agreement, the following provisions govern the accounting treatment of certain items:

1. Right to share profits: Partners are entitled to share equally in the profits earned and to contribute equally to losses incurred.

2. Interest on capital: No interest is payable on the capitals contributed by them. Similarly no interest is to be charged on drawings. However, where partnership agreement provides for payment of interest on capital, such interest is payable out of profits of the business unless otherwise provided.

3. Interest on advances: A partner who makes an advance of money to the firm beyond the amount of his capital for the purpose of business, is entitled to get interest thereon at the rate of 6% p.a.

4. Right to share subsequent profits after retirenent: Where any member of a firm has died or otherwise ceased to be a partner and the surviving or continuing partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them, the outgoing partner or his estate is entitled, at the option of himself or his representatives to such share of the profits made since he ceased to be a partner as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent per annum on the amount of his share in the property of the firm.

5. No remuneration for firm’s work: A partner is required to attend diligently to his duties in conducting the business of the finn. He has no right to receive remuneration or salary for taking part in the conduct of the business.

Types of Standards Costing

Types of Standards 

Ideal standard

Ideal Standard is a standard, which:can be attained under the most favourable conditions. No provision is made e.g. for shrinkage. spoildqe or matching breakdowns. Users of this type of standard believes that the resulting unfavourable

Accountiug for Fixed Assets

variance will remind management of the need tor improvement in all phases of’operations. Ideal standard are rot widely used in practice because they may influence employee motivation adversely.

Normal Standard:

These standards are based on past average, adjusted with anticipated future changes. We can say these are the standard that may be achieved under normal operating condiiions. These siandard are however difficult to set because they require a degree ol forecasting. The variances thrown out under this system are deviation from normal efficiency, normal sales volume or normal productive volume. If the actual performance is found to be abnormal. large variance” may result and it is necessary to revise standard find out actual result. 

Meaning of Partnership

MEANING OF PARTNERSHIP

Partnership form of business organisation came into existence on account of limitations of sole proprietary concerns. The major limitations of sole proprietary concerns are those of shortage of funds, uncertainty about existence, unlimited personal liability etc. In case of a partnership business two or more persons join hands together to do a business. Thus, the risk, funds, responsibility all are shared. The Indian Partnership Act, 1932 is applicable to contracts of Partnership. According to Section 4 of the said Act partnership is “the relation between persons who have agreed to share the profits of a business carried on by all or any ofthcmacting for all”. Persons who have entered into partnership with one another are called individually ‘partncrs’ and collectively a ‘firm’ and the name undcr which the business is carried on is called the ‘firm’s name’.

The term ‘firm’ is merely a commercial notion. Law does not invest the firm with legal personality apart from its partners except for the purposes of assessment of income-tax. A ‘firm’ cannot become a member of another partnership firm though its partners can join any other firm as partners.