Page 152 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes (c) Government: Government is interested to formulate laws to regulate business
activities and also law relating to taxation etc. Financial statements help while
computing National Income statistics etc.
(d) Taxation authorities: Financial Statements provide information relating to
operational results as well as financial position of the business. Tax authorities
decide the amount of tax as per financial statement. It is very useful to other
taxation authorities such as sales tax etc.

(e) Stock Exchange is meant for dealing in share/securities. Purchase and sale of
such shares and securities are possible through stock exchanges which provide
financial information about each company which is listed with them.
Thus, we see that financial statements are very helpful and useful.

Self Assessment

Fill in the blanks:
1. …………………… mean profit & loss account and the balance sheet.

2. There are two types of persons interested in financial statements: (a) ……………………
users and (b) …………………… users.

8.3 Capital and Revenue Expenditure and Receipt

As per matching concept of accounting the revenues of a period are matched with the expenses
incurred in this period to generate this revenue in order to determine the amount of profit or
loss of the business. To calculate the accurate amount of profit or loss it is must that there should
be a recognition of the revenues and expenditures. If there is wrong recognition of expenses or
revenues, results of the business will also be wrong. Thus the distinction between the capital and
revenue items is very important. In spite of being a difficult job of distinction of capital and
revenue items, some rules are framed for the recognition of these items.

8.3.1 Classification of Expenditures

Expenditures of a business are classified into following three:

1. Capital Expenditure: If expenditure is incurred in the business to get its benefit for a long
period, such expenditure is called capital expenditure. Capital expenditure may be done
to acquire the new assets (tangible or intangible), to enhance the earning capacity of the
business, for some addition and improvement of the existing properties or assets, for the
development of the business or for the replacement of an existing assets.
Some examples of capital expenditure are given below:
(i) Expenditure to acquire a fixed asset as purchase of plant and machinery, land and
buildings and furniture, etc.
(ii) Expenditure for the addition and improvement of the assets as construction of a
room in the building.

(iii) Expenditure for the erection or setting up of a new plant.
(iv) Expenditure to acquire the right to run the business as copyright, patents, licence etc.

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