Page 62 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 4: Final Accounts

4.2.1 Classification of Expenditures Notes

Expenditures of a business are classified into following three categories:
1. Capital expenditure: If an expenditure is incurred in the business to get its benefit for a
long period, such expenditure is called capital expenditure.

Example: Expenditure to acquire a fixed asset as purchase of plant and machinery, land
and buildings and furniture, etc.
2. Revenue expenditure: When an expenditure is done for a short period (less than one year)
and for the regular operation of business, it is termed as revenue expenditure. Its benefit
are taken by the business in the current period only.

Example: Expenses incurred during the normal course of business – as salaries of the
staff, fuel and electricity used for the running of machinery and cost of sales.

3. Deferred revenue expenditure: When revenue expenditure is done for the benefit of two or
three years, it is termed as deferred revenue expenditure.

Example: cost of heavy campaign of advertisement, preliminary expenses, etc. The benefit
of such type of expenditure is enjoyed by the company for a number of years.
4.2.2 Classification of Receipts

Receipts of a business are classified into following categories:
1. Capital receipts: Capital receipts include the sale of fixed assets, long-term investments,
issue of share capital, debentures and loan raised. Capital receipts are different from the
capital profits or loss. The entire amount from the sale of assets is called capital receipts
and the difference of sale proceeds and cost of assets is capital profit or loss.

2. Revenue receipts: Receipts which are obtained during the normal course of business are
called revenue receipts. In other words, the receipts which are not capital receipts are
revenue receipts as sale of goods.

Example: goods worth 5,000 are sold at 6,000. Here, the entire sale of
6,000 will be revenue receipts and the revenue profit will be 1,000 only.

4.3 Trading and Profit & Loss Account

In the Trading and Profit & Loss Account all those accounts are disclosed which affect the profit
or loss of the business. In other words, all the nominal accounts of the Trial Balance are used to
prepare the Trading and Profit & Loss Account. In the left hand side, all the expenses incurred
during a period and in the right hand side all the incomes earned during a period are disclosed.
This account contains two parts:
1. Trading Account

2. Profit & Loss Account

LOVELY PROFESSIONAL UNIVERSITY 57