Accounting Terms:-Part 6

Capital Transactions
The business transactions, which provide benefits or supply services to the business concern for more than one year or one operating cycle of the business, are known as capital transactions.
The transactions which relate to capital are again sub-divided into capital expenditure and capital receipt.

Capital Expenditure
Capital expenditure consists of those expenditures, the benefit of which is carried over to several accounting periods. In other words the benefit of which is not consumed within one accounting period.

Capital Receipt
Capital receipt is one which is invested in the business for a long period. It includes long-term loans obtained from others and any amount realized on the sale of fixed assets.

Revenue Transactions
The business transactions, which provide benefits or supplies services to a business concern for an accounting period only, are known as revenue transactions.

Revenue Expenditure
Revenue expenditures consist of those expenditures, which are incurred in the normal course of business. They are incurred in order to maintain the existing earning capacity of the business. It helps in the upkeep of fixed assets.

Revenue Receipt
Revenue receipt is the receipt of income which is earned during the normal course of business

Capital profits
Capital profit is the profit which arises not from the normal course of the business. Profit on sale of a fixed asset is an example of capital profit.

Revenue profits
Revenue profit is the profit which arises from the normal course of the business. i.e, Net Profit – the excess of revenue receipts over revenue expenditures.

Capital Losses
Capital losses are the losses which arise not from the normal course of business. Loss on sale of a fixed asset is an example of capital loss.

Revenue Losses
Revenue losses are the losses that arise from the normal course of the business. In other words, ‘net loss’ – i.e., excess of revenue expenditures over revenue receipts.

Trading Account
Trading means buying and selling. The trading account shows the result of buying and selling of goods.

Need
At the end of each year, it is necessary to ascertain the net profit or net loss. For this purpose, it is first necessary to know the gross profit or gross loss. The trading account is prepared to ascertain this. The difference between the selling price and the cost price of the goods is the gross earnings of the business concern. Such gross earning is called as gross profit. However, when the selling price is less than the cost of goods purchased, the result is gross loss.

Profit and Loss Account

After calculating the gross profit or gross loss the next step is to prepare the profit and loss account. To earn net profit a trader has to incur many expenses apart from those spent for purchases and manufacturing of goods. If such expenses are less than gross profit, the result will be net profit. When total of all these expenses are more than gross profit the result will be net loss

Need:

The aim of profit and loss account is to ascertain the net profit earned or net loss suffered during a particular period.

Format

Balance Sheet:

This forms the second part of the final accounts. It is a statement showing the financial position of a business. A balance sheet is prepared by taking up all personal accounts and real accounts (assets and properties) together with the net result obtained from profit and loss account. On the left-hand side of the statement, the liabilities and capital are shown. On the right-hand side, all the assets are shown. A balance sheet is not an account but it is a statement prepared from the ledger balances. So we should not prefix the accounts with the words ‘To’ and ‘By’. Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position

of the same on any particular date.

Need :

The need for preparing a Balance sheet is as follows:

• i. To know the nature and value of assets of the business
• ii. To ascertain the total liabilities of the business.
• iii. To know the position of owner’s equity.

Format

The Balance sheet of a business concern can be presented in the following two forms

• Horizontal form or the Account form
• Vertical form or Report form

Classification of Assets and Liabilities Assets

Assets

Assets represent everything which a business owns and has money value. In other words, asset includes possessions and properties of the business. An asset is classified as follows:

a) Tangible Assets:

Assets which have some physical existence are known as tangible assets. They can be seen, touched and felt, e.g. Plant and Machinery Tangible assets are classified into

1. Fixed assets: Assets which are permanent in nature having a long period of life and cannot be converted into cash in a short period are termed as fixed assets.
2. Current assets: Assets which can be converted into cash in the ordinary course of business and are held for a short period is known as current assets. This is also termed as floating assets. For example, cash in hand, cash at bank, sundry debtors etc

b) Intangible Assets 

The assets which have no physical existence and cannot be seen or felt. They help to generate revenue in future, e.g. goodwill, patents, trademarks etc.

c) Fictitious Assets

These assets are nothing but the unwritten off losses or non-recoupable expenses. They are really not assets but are worthless items. For example, Preliminary expenses. 

Liabilities

The amount which a business owes to others is liabilities. Credit balance of personal and real accounts together with the capital account are liabilities.

a) Long-Term Liabilities

Liabilities which are repayable after a long period of time are known as Long-Term Liabilities. For example, capital, long-term loans etc.

b) Current Liabilities

Current liabilities are those which are repayable within a year. For example, creditors for goods purchased, short term loans etc.

c) Contingent liabilities 

It is an anticipated liability which may or may not arise in future. For example, liability arising from bills discounted. Contingent liabilities will not appear on the balance sheet. But shown as a footnote.

Marshalling of Assets and Liabilities

The term ‘Marshalling’ refers to the order in which the various assets and liabilities are shown in the balance sheet. The assets and liabilities can be shown either in the order of liquidity or in the order of permanence.

a) In order of liquidity

Liquidity means convertibility into cash. Assets will be said to be liquid if it can be converted into cash easily, they are placed at the top of the balance sheet. Liabilities are arranged in the order of their urgency of payment. The most urgent payment to be made is listed at the top of the balance sheet.

b) In order of permanence

This order is exactly the reverse of the above. Assets and liabilities are recorded in the order of their life in the business concern.

Balance Sheet Equation

An important thing to note about the Balance Sheet is that the total value of the assets is always equal to the total value of the liabilities. This is because the liability to the owner - capital, is always made up of the difference between assets and liabilities. Thus,

Assets = Liabilities + Capital

or

Capital = Assets - Liabilities

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