Account 4 Marks Question

Classification of receipts into capital receipts and revenue receipts is essential for the preparation of financial statements since revenue receipts are shown on the credit side of Trading and Profit and Loss Account whereas capital receipts are shown in the Balance Sheet.

Classification of assets into current and non-current helps in ascertaining the liquidity position of the business entity. Non-Current Assets are held for continued use in the business whereas current assets are expected to be converted into cash within one year.

1. Revenue: Revenue in accounting ineans the income of a recurring (regular) nature from any source. It consists of the amount received from sale of goods and from service provided to customers. It also includes receipt of rent, commission, dividend, interest etc. Revenue is related with the day-to-day affairs of the business and should also be regular in nature. As such, the amount of capital introduced by the proprietor or borrowing loan is not revenue
2. Trade Payables: Trade payables is the amount payable on account of goods purchased or services taken in the normal course of business.

Trade Payables include both 'Creditors' and 'Bills Payables'.

3. Fictitious Assets: 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. These assets are not really assets but are shown on the Assets side only for the purpose of transferring them to the Profit & Loss Account gradually over a period of time.
4. Working Capital: The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.

Working Capital = Current Assets - Current Liabilities.

1. Capital Expenditure: Any expenditure which is incurred in acquiring or increasing the value of a fixed asset is termed as capital expenditure. As such, the amount spent on the purchase or erection of Building, Plant, Furniture etc. is capital expenditure. Such expenditure yields benefit over a long period and hence written in Assets.
2. Non-Current Assets: Non-Current Assets refer to those assets which are held for continued use in the business for the purpose of producing goods or services and are not meant for sale. Examples of non-current assets are long-term investments and fixed assets such as Land and Building, Plant and Machinery, Computer, Motor Vehicles, Furniture etc.

1. Liability: It refers to the amount which the firm owes to outsiders (excepting the amount owed to proprietors). In the words of Finney and Miller, “Liabilities are debts, they are amounts owed to Creditors”. This can be expressed as:

Liabilities = Assets - Capital
Thus, when a firm purchases goods on credit from A, the amount owing to A is a liability. Likewise when a bank account is overdrawn, the amount owing to the bank (i.e., bank overdraft) is known as a liability. Likewise the Bills Payable, Creditors, Unpaid Wages are also the examples of liabilities.

2. Stock: The term stock’ includes the value of those gocds which are purchased for reselling and which are lying unsold at the end of accounting period. The Stock may be of two types:

• ​​​​​Opening Stock.
• Closing Stock.

The term 'Opening Stock' means the value of goods lying unsold at the beginning of the accounting period whereas the term "Closing Stock' means the value of goods lying unsold at the end of the accounting period.

3. Business Transaction: A business transaction is an economic activity of the business that changes its financial position. Whenever any business transaction takes place, it results in a change in the values of some of the assets, liabilities or capital.
4. Drawings: Any cash or value of goods withdrawn by the owner for personal use or any private payments made out of business funds are called drawings.

1. Assets: Anything which is in the possession or is the property of a business enterprise including the amounts due to it from others, is called an asset. In other words, anything which will enable a business enterprise to get cash or a benefit in future is an asset. Thus, Cash and Bank balances, Stock, Furniture, Machinery, Land and Building, Bills Receivable, Money owing by Debtors etc. are all assets.
2. Capital: It refers to the amount invested by the proprietor in a business enterprise. Amount may be in the form of cash, goods or assets. It is the amount with the help of which goods and assets are purchased in the business. As such, in order to calculate the amount of capital all current assets and fixed assets are added up and external liabilities are deducted out of it.

Capital = Assets - Liabilities

3. Goods: Goods include all those things which are purchased for resale or which are used for producing the finished products which are also meant to be sold. Thus, for a furniture dealer purchase of chairs and tables is termed as goods, while for others it is furniture and is termed as an asset. Similarly, for a stationery trader, stationery is goods, whereas for others it is expense.
4. Drawings: Any cash or value of goods withdrawn by the owner for personal use or any private payments made out of business funds are called drawings.
5. Trade Receivables: Trade receivables refer to the amount receivable on account of sale of goods or services rendered by the company in the normal course of business.

Trade receivables include both Debtors and Bills Receivables.

1. Amount received from sale of goods.
2. Amount received from providing service to customers.
3. Receipts of commission, interest, rent etc.