All questions of Financial Statements - I for SSC CGL Exam

Types of Accounts in Balance Sheet

There are three types of accounts in accounting – Real, Personal, and Nominal accounts. However, in the balance sheet, only two types of accounts are shown, which are as follows:

Real and Personal Accounts

The balance sheet is a statement of assets and liabilities of an organization. It is divided into two main sections – assets and liabilities. The accounts shown in the balance sheet are of two types:

1. Real Accounts: These accounts represent tangible and intangible assets of the organization. They are shown on the asset side of the balance sheet. Examples of real accounts are land, buildings, machinery, patents, trademarks, etc.

2. Personal Accounts: These accounts represent persons, firms, or institutions with whom the organization has transactions. They are shown on the liability side of the balance sheet. Examples of personal accounts are accounts payable, loans payable, salaries payable, etc.

Nominal accounts are not shown in the balance sheet because they are related to the income and expenses of the organization, which are shown in the income statement.

Conclusion

In conclusion, the balance sheet shows only two types of accounts, which are real and personal accounts. Real accounts represent assets, and personal accounts represent liabilities. Nominal accounts are not shown in the balance sheet because they are related to the income and expenses of the organization, which are shown in the income statement.

EBIT (earnings before interest and taxes) is a company's net income before income tax expense and interest expenses have been deducted. EBIT is used to analyze the performance of a company's core operations without the costs of the capital structure and tax expenses impacting profit.

Direct expense are those... Which are directly helping in the production.. Or manufacturing (eg. Freight, octri, factory rent etc) so they are debited to the trading account... And indirect expense are those which are indirectly helping in production process (eg advertisement expenses, carriage outward, postage etc) so they are debited to profit and loss account

Capital receipts are a non-recurring incoming cash flow into your business, which leads to the creation of a liability (a debt to be paid in the future) and a decrease in company assets (resources that lead to capital gain).

Therefore, CAPEX is both amortized and depreciated, depending on whether it is tangible or intangible. To quote, "Expenses incurred to acquire intangible assets such as goodwill, patents, etc. are also capital expenditure.

 Amount spent on unsuccessful patent right is a revenue expenditure as the entire amount spent is a loss with no signs of any recovery in future through any income. Hence, entire amount should be written off all at one go.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

Brokerage on the issue of shares and debentures is a Deferred Revenue Expenditure. This expenditure is incurred in one period but its benefit extends to a period of 3 to 5 years. Hence this amount is deferred and written off.

Loss of cash due to theft committed either by the employees or by the outsiders, after business hours, is a capital loss because the loss is outside the trade and not incidental to the business. If the loss had been caused during the business hours it would have been a revenue loss because it is incidental to the business.

Share premium is a capital receipt as it is received occasionally when shares are issued and its usage is also restricted. It is shown on the liability side of the balance sheet. It is not in the nature of a regular income and hence its not a revenue receipt

Capital account bcoz due to drawing cash account will be affected which in turn also affect the capital account

All expenses incurred at the time of purchase of a capital asset or to bring the new capital asset in the working condition should be capitalised. The following expenses were incurred at the time of purchase of car:Cost of car Rs. 5,60,000Repairs Rs. 25,000 Insurance Rs. 10,000 Petrol Rs.1,500 Amount debited to Car A/c Rs. 5,96,500

 Capital receipts are represented in Balance Sheet of the liability side. A reasonable portion out of it is transferred to Profit and Loss Account of each year i.e. it is recognized as income.

Explanation:

When the old machinery is purchased, the cost of the machinery along with any additional expenses incurred to make it functional are recorded as the cost of the machinery. These expenses include installation charges, freight charges, etc.

In this case, the old machinery was purchased for Rs. 10,000 and installation charges of Rs. 1,000 were incurred. Therefore, the total cost of the machinery would be Rs. 11,000 (10,000 + 1,000).

However, repairs to the old machinery were also done which cost Rs. 7,000. Repairs are not considered as a part of the cost of the machinery. Repairs are expenses incurred to maintain the machinery in working condition. Hence, repairs account will be debited by nil.

Therefore, the correct option is C, i.e., nil.

To summarize:

• The cost of the machinery includes the purchase cost along with any additional expenses incurred to make it functional.
• Repairs to the machinery are not considered as a part of the cost of the machinery.
• Repairs account will be debited by nil.

Recovery of bad debt is a revenue receipt. Let's break down the answer into headings and HTML bullet points:

Revenue receipt:

- Revenue receipts are the income earned by a business by selling goods or services or any other operational activity.
- Recovery of bad debt is a revenue receipt as it is the income earned by the business through the recovery of the amount that was previously written off as bad debt.

Capital receipt:

- Capital receipts are the income earned by a business through non-operational activities such as the sale of long-term assets, raising of capital, etc.
- Recovery of bad debt cannot be considered as a capital receipt as it is earned through an operational activity.

Capital expenditure:

- Capital expenditure refers to the expenses incurred by a business for acquiring long-term assets such as buildings, land, machinery, etc.
- Recovery of bad debt cannot be considered as capital expenditure as it does not involve the acquisition of any long-term assets.

Revenue expenditure:

- Revenue expenditure refers to the expenses incurred by a business for the day-to-day operations such as salaries, rent, utilities, etc.
- Recovery of bad debt cannot be considered as revenue expenditure as it does not involve any expenses incurred by the business.

In conclusion, recovery of bad debt is a revenue receipt as it is the income earned by a business through an operational activity.

Amount spent on renewal fee for patent right is a revenue expenditure.

An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system. Its counterpart, a capital expenditure (capex), is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier involves capex, and the annual paper, toner, power and maintenance costs represents opex.For larger systems like businesses, opex may also include the cost of workers and facility expenses such as rent and utilities.

 Deferred revenue expenditure is that expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods. Heavy advertisement expenditure is the expenditure made in the present which will benefit the organization in the future upcoming years and hence it is a deferred revenue expenditure.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

Capital Expenditure

Capital expenditure refers to the expenditure incurred for the acquisition of fixed assets or for increasing the earning capacity of the business. The benefits of capital expenditure accrue over a long period of time and are not consumed in the immediate future. The following are the examples of capital expenditure:

- Expenses for obtaining a license
- Preliminary expenses for floating a company
- Initial expenditure for acquiring patent right
- Purchase of land, building, machinery, furniture, etc.

Not an Example of Capital Expenditure

Depreciation on fixed assets is not an example of capital expenditure. Depreciation is the allocation of the cost of a fixed asset over its useful life. It is not an expenditure incurred for the acquisition of a new asset or for increasing the earning capacity of the business. Depreciation is a non-cash expense that reduces the value of the asset over time. It is recorded as an expense in the income statement, but it does not involve any cash outflow.

Conclusion

In conclusion, capital expenditure refers to the expenditure incurred for the acquisition of fixed assets or for increasing the earning capacity of the business. Depreciation on fixed assets is not an example of capital expenditure as it is the allocation of the cost of a fixed asset over its useful life and does not involve any cash outflow.

Capital receipts are a non-recurring incoming cash flow into your business, which leads to the creation of a liability (a debt to be paid in the future) and a decrease in company assets (resources that lead to capital gain).

Rs. 2,500 spent on the overhauling on purchase of second hand machinery to put it in working condition and to derive endurable long- term advantage is a capital expenditure.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

In accounting, the convention of conservatism, also known as the doctrine of prudence, is a policy of anticipating possible future losses but not future gains. This policy tends to understate rather than overstate net assets and net income, and therefore lead companies to "play safe".

Revenue Expenditure are recorded as expense in P/L A/c whereas Capital Expenditure is shown as addition to assets. Thus, when revenue expenditure is wrongly recorded as Capital Expenditure, the net profit is overstated and assets are also overstated.

Receipts which are obtained in course of normal business activities are revenue receipts and all receipts other than revenue receipts are capital receipts. Securing of loan is not a normal business activity and hence medium term loan taken from bank for augmenting working capital is a capital receipt.

And Loss Statement

A) Balance Sheet. Rent receivable is an asset that represents the amount of rent owed to a business that has not yet been collected. It is reported on the balance sheet under the current assets section.

This deferred expense will be reported on the balance sheet as a noncurrent or long-term asset. Often the term prepaid expense indicates that a payment was made less than one year before the cost is expensed. This prepaid expense is reported as a current asset.

Classification of Expenditure

Expenditure can be classified into various types based on the nature and purpose of the expenditure. Some of the common types of expenditure include:

1. Capital Expenditure: Capital expenditure refers to the expenditure incurred for acquiring or improving a fixed asset or a long-term investment. It is expected to provide benefits for more than one accounting period.

2. Revenue Expenditure: Revenue expenditure refers to the expenditure incurred for the day-to-day operations of the business. It is expected to provide benefits for the current accounting period only.

3. Preliminary Expenditure: Preliminary expenditure refers to the expenditure incurred before the commencement of a business or before the start of commercial production. It includes expenses such as incorporation fees, legal fees, and expenses incurred for the preparation of a feasibility report.

4. Deferred Revenue Expenditure: Deferred revenue expenditure refers to the expenditure that is revenue in nature but its benefits are expected to be derived over a period of time. It is treated as an asset and is written off over a period of time.

Explanation

In the given question, the expenditure incurred of Rs. 20,000 is for the trial run of a newly installed machinery. This expenditure is incurred for testing the machinery and ensuring that it is working properly. As the expenditure is incurred for a capital asset, which is the newly installed machinery, it is classified as capital expenditure. The expenditure is expected to provide benefits for more than one accounting period as it is incurred for a long-term asset. Thus, the correct answer is option 'B' - capital expenditure.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense.

Debiting Wages Paid for Erection of Machinery to Machinery Account:

When machinery is purchased, it is necessary to install it in the factory. The cost of installation is known as erection cost. Wages are paid for erecting machinery. These wages are debited to the machinery account.

Reasons for Debiting Wages Paid for Erection of Machinery to Machinery Account:

The reasons why wages paid for erection of machinery are debited to machinery account are as follows:

1. Part of the cost of machinery: Wages paid for erection of machinery form a part of the cost of machinery. Hence, they are debited to the machinery account.

2. Capital expenditure: Erection of machinery is a capital expenditure. Hence, wages paid for erection of machinery are debited to the machinery account.

3. Enhances the value of machinery: Erection of machinery enhances the value of machinery. Hence, wages paid for erection of machinery are debited to the machinery account.

4. Directly related to machinery: Wages paid for erection of machinery are directly related to machinery. Hence, they are debited to the machinery account.

Conclusion:

Thus, it can be concluded that when wages are paid for erection of machinery, they are debited to the machinery account.

A is false because we do capital expenditure for long period. It is not done for short period.

Accrued income is considered an asset because accrued income is that income which we have earned but have not received. So we take it as an asset.

Capital receipts are represented in Balance Sheet of the liability side. A reasonable portion out of it is transferred to Profit and Loss Account of each year i.e. it is recognized as income.

Deferred Revenue Expenditure is an expenditure which is revenue in nature and incurred during an accounting period, but its benefits are to be derived in multiple future accounting periods.