Financial Accounting

    • Capital expenditure refers to expenditure the benefit of which is not fully derived in one year but spread over several periods. Examples are expenses on acquisition of fixed assets, additions to fixed assets.
    • Expenses like preliminary expenses, research and development expenses, interest paid during construction period etc. are taken to assets side of Balance sheet and shown under ‘Miscellaneous Expenditure’.
    • Revenue expenditure is the expenditure incurred the benefit of which is derived in the year in which the expenditure is incurred. Examples are raw materials, repairs, depreciation. Such expenses are debited to Profit and Loss account. Similarly Revenue incomes such as interest received, dividend received are credited to the Profit and Loss account.
    • The following steps are to be kept in mind
    • All expenses are debited to Profit and Loss account.
    • All incomes are credited to Profit and Loss account.
    • In addition to treating the incomes and expenses found in the Trial balance, we may have to give special treatment to certain ‘Adjustments’.
    • The profits are credited to Reserves account. If there is net loss, it is debited to reserves account in the balance sheet, in the case of companies and in the case of sole traders and partnerships the net profit is credited to the capital account and net loss is debited to the capital account.
    • Trading account and Profit and Loss account are prepared on accrual basis. Trading account reflects the gross profit, the difference between the sales and cost of goods sold.
    • Profit and Loss account is prepared to ascertain the profits of the company. Net profit is determined after deducting other expenses like general administrative or selling and distribution expenses from the gross profit.
    • There are no hard and fast rules about the segregation of expenses between the Trading account and Profit and Loss account. But the generally accepted principles are:
    • Opening inventory is debited to the Trading account.
    • Closing inventory is credited to the Trading account.
    • Purchase less returns are debited to Trading account.
    • Sales less returns are credited to the Trading account.
    • All expenses relating to the trading and manufacturing account are debited to the Trading account.
    • The balance being gross profit is transferred to the Profit and Loss account.