It is important to diferentiate between capital expenditure and revenue expenditure
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Fixed Asset is last longer and not for resale. For example is premises, motor vehicles, machinery, and fixtures and fittings. Current Asset is liquid and bought for resale. For example is cash in hand, cash at bank, stock and debtor.
i) Business entity concept is the affairs of a business are to be treated as
being quite separate from the non-business activities of its owners.
Example is "the figure for fixed assets includes a camera that the
owner of the business has bought for his own use".
Accrual concept is concerned with the different between cash receipts and cash expenditure (actual payments and receipts of money for items) and revenue and expenditure. It states that items should be recorded when used and not when paid for.
Example is "a bill for electricity was received in the lost financial year but has been recorded in the current year as payment was only made recently".
Going Concern Concept is it implies that the business will continue to operate for the foreseeable future.
Example: the assumption should not be made are:
If the business is going to close down in the near future
Where shortage of cash makes it almost certain that the business will have to cease trading
Business have to close down because of shortage of cash
The term is about to close down as the owner is retiring the accounts
have not been altered.
Consistency concept is each firm should try to choose the methods which give the most reliable picture of the business.
Example is the method used for calculating stock has been changed from LIFO to FIFO to overage cost.
i) Capital expenditure is made when a firm spends money either to:
Buy fixed assets, or
Add to the value of an existing fixed asset.
Included in such amounts should be those spent on:
Acquiring fixed assets.
Bringing them into the firm.
Legal costs of buying buildings.
Carriage inwards on machinery bought.
Any other cost needed to get the fixed asset ready for use.
Revenue expenditure is expenditure which is not for increasing the value
fixed assets, but for running the business on a day-to-day basis, is known as revenue expenditure.
The difference between revenue and capital expenditure can be seen clearly with the total cost of using a motor van for a firm. To buy a motor van is capital expenditure. The motor van will be in use for several years and is, therefore, a fixed asset.
To pay for petrol to use in the motor van for the next few days is revenue expenditure. This is because the expenditure is used up in a few days and does not add to the value of fixed assets.
Revenue expenditure is treated to expenses and they will posted to Income statement.
Capital expenditure is treated to fixed assets and transact to Balance sheet.
Difference between capital and revenue expenditure
Type of Expenditure
1. Buying motor van
2. Petrol costs for motor van
3. Repairs to motor van
4. Putting extra headlights on motor van
5. Buying machinery
6. Electricity cost of using machinery
7. We spent RM 1,500 on machinery. RM 1,000 was for an item added to the machine: RM500 for repairs
Revenue RM 500
8. Painting outside of new building
9. Three years later- repainting outside of building in (8)
d) Reducing balance method
Cost price 1 year
Cost = RM 100,000
% = 10%
2005 Cost = 100,000 X 10% = 10000 X 7/12= 5833 100,000 - 5833 = 94167
2006 Cost = 94167 X 10% = 94167 X 7/12 = 5493 94167 - 5493 = 88674
e) i) Relevance is one more factors that must be present in the information for it to be
useful. Information that is not relevant is considered as a waste of valuable time in
ii) Reliability is the right decision based on a set of financial information would also
depend on the reliability of the information. In the context, self generated
information is considered to be the most reliable as compared to information gather
by third parties. The user must be able to depend on the truthfulness of the
iii) Comparability is procedures and practices should remain the same across time and
reports, if difference is occurs they should be due to substantive differences in the
events and conditions reported rather than arbitrarily implemented practices or
procedures for data collection.
iv) Understandability is information should be simple but not over simplified.
Explanations and interpretations should be included where necessary.
Understandability of information is governed by user characteristics and
characteristics of information provided. Understandability may be relating to
a particular decision makes.
i) Share holder
You have been supplied with the following balances for Betsy Li, a sole trader, for the year ended 31 December 2009:
Property at cost 140,000
Equipment at cost 70,000
Provision for depreciation at 01/01/09:
- Property 4,200
- Equipment 17,500
Stock at 01/01/09 17,400
Discount allowed 14,000
Discount received 1,900
Returns outward 17,600
Wages and salaries 43,400
Bank overdraft 2,900
Cash in hand 520
Provision for bad debts at 01/01/09 200
General expenses 11,400
Long term loan 20,000
Capital at 01/01/09 30,670
The following adjustments need to be taken into account:
Stock at 31/12/09 is $21,600
Wages and salaries outstanding at 31/12/09 are $4,,100
General expenses includes a prepayment for rates of $1,000
The provision for bad debts needs increasing to $280
Depreciation for the year has still to be provided as follow:
Property 1.5% per year using the straight line method
Equipment 25% per year using the reducing balance method
Loan interest of $2,000 is outstanding
a) Prepare a trial balance for Betsy Li as at 31 December 2009. (10 marks)
b) Prepare the Income Statement and Balance Sheet for Betsy Li for the period ending 31
December 2009. (15 marks)
ANSWER QUESTION 2
Trial Balance at 31 December 2009
Equipment at cost
Wages and salaries
Cash in hand
Provision for bad debts
Long term loan
Income statement for Betsy Li for the year ending 31 December 2009
less) Cost of good sales
less) Return outwards
less) Closing stock
Wages and salaries (43,400+4,100)
General expenses (11,400-1000)
i) Provision for depreciation = Property at cost
ii) = Equipment at cost
iii) Provision for doubtful dept
140,000 X 1.5% = 2100
70,000 - 17,500 = 52,500 X 25% = 13,125
iii) Provision for bad debts
Balance b/d 280 Balance b/d 280
Income statement 80
Provision for bad debt
General expenses prepayment
Wages and salaries outstanding
Loan interest outstanding
add) Net Profit
Long term loan