It is important to diferentiate between capital expenditure and revenue expenditure

It is important to diferentiate between capital expenditure and revenue expenditure 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 Expenditure Type of Expenditure 1. Buying motor van Capital 2. Petrol costs for motor van Revenue 3. Repairs to motor van Revenue 4. Putting extra headlights on motor van Capital 5. Buying machinery Capital 6. Electricity cost of using machinery Revenue 7. We spent RM 1,500 on machinery. RM 1,000 was for an item added to the machine: RM500 for repairs Capital RM1,000 Revenue RM 500 8. Painting outside of new building Capital 9. Three years later- repainting outside of building in (8) Revenue 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 decision making. 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 information. 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 ii) Manager iii) Bank iv) Government v) Creditor QUESTION 2 You have been supplied with the following balances for Betsy Li, a sole trader, for the year ended 31 December 2009: RM Property at cost 140,000 Equipment at cost 70,000 Provision for depreciation at 01/01/09: Property 4,200 Equipment 17,500 Purchases 385,000 Sales 592,000 Stock at 01/01/09 17,400 Discount allowed 14,000 Discount received 1,900 Returns outward 17,600 Wages and salaries 43,400 Creditors 28,500 Debtors 15,800 Bank overdraft 2,900 Cash in hand 520 Drawings 17,950 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 Required: 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 Property 140,000 Equipment at cost 70,000 Property 4,200 Equipment 17,500 Purchases 385,000 Sales 592,000 Stock 174,00 Discount allowed 14,000 Discount received 1,900 Return outward 17,600 Wages and salaries 43,400 Creditors 28,500 Debtors 15,800 Bank overdraft 2,900 Cash in hand 520 Drawings 17,950 Provision for bad debts 200 General expenses 11,400 Long term loan 20,000 Capital 30,670 715470 715470 Income statement for Betsy Li for the year ending 31 December 2009 Sales 592,000 592,000 less) Cost of good sales Opening stock 17,400 Purchase 385,000 less) Return outwards (17,600) 367,400 Net purchase 384,800 less) Closing stock (21,600) (363,200) Gross profit 228,800 add) Revenue Discount received 1,900 230,700 less) Expenses Discount allowed 14,000 Wages and salaries (43,400+4,100) 47,500 General expenses (11,400-1000) 10400 i) Provision for depreciation = Property at cost 2,100 ii) = Equipment at cost 13,125 iii) Provision for doubtful dept 80 Loan interest 2,000 (89205) Net profit 141,495 140,000 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 80 280 280 Cost Accumulated Depreciation Fixed assets Property 140,000 6,300 133,700 Equipment 70,000 30,625 39,375 173075 Current assets Stock 21,600 Debtor 15,800 Provision for bad debt (280) 15,520 General expenses prepayment 1000 38,640 Current liability Creditor 28,500 Bank overdraft 2900 Wages and salaries outstanding 4,100 Loan interest outstanding 2000 (37,500) 1,140 174,215 Financed by Capital 30,670 add) Net Profit 141,495 172,165 less) Drawing (17,950) 154,215 Non-current liabilities Long term loan 20,000 174,215