Account 3 Marks Question

Financial statements cannot be prepared without classifying the expenditure into capital and revenue. Capital expenditure is written in the Balance Sheet whereas revenue expenditure is written on the debit side of Trading or Profit and Loss Account.

Fixed assets refer to those assets which are held for continued use in the business and are not meant for resale whereas current assets are either meant for sale or which are expected to be converted into cash within one year.

These are the Assets which cannot be realised in Cash or no further benefit can be derived from these assets. Such assets include Debit balance of P & L A/C and the expenditure not yet written off such as Advertisement Expenses etc.

If the benefit of an expenditure is exhausted within a year, it is treated as revenue expenditure (also called expense). On the other hand, if the benefit of an expenditure lasts for more than a year it is treated as capital expenditure (also called an asset).

1. Assets: Bank balance, Debtors.
2. Liabilities: Bank overdraft, creditors.
3. Expenses: Salary to Manager, Discount to debtors, cost of goods sold.
4. Revenues: Sales.

Profit is the excess of revenues over expenses during an accounting period. It is the result of business transactions which are of regular nature whereas gain arises from events or transactions which are incidental to business such as sale of a fixed asset or winning a lottery prize.

Debtors are the persons who owe an amount to the enterprise for the goods sold or service provided to them on credit whereas creditors are the persons who are to be paid an amount by the enterprise for buying from them goods or services on credit.

Amount spent on acquiring or erection of fixed assets is termed as capital expenditure. Such expenditure is shown in the assets because it yields benefit over a long period of time.

Expense is the cost incurred in producing and selling the goods and services. Thus it includes cost of goods sold and amount paid for salaries, rent, commission etc. On the other hand, expenditure is a wider term which includes expenses also. Expenditure is the amount spent for acquiring assets, goods and services.