Purchases: A purchase involves the acquisition of goods or services in

exchange for a payment of some kind. The payment is usually in cash or

credit (to be paid later). A purchase may also be part of a barter transaction
where different non-cash assets are exchanged, or it may be in exchange for the
assumption of a liability.
Revenue Expenditure: Revenue expenditures are short-term expenses
used in the current period or typically within one year. Revenue
expenditures include the expenses required to meet the ongoing operational
costs of running a business, and thus are essentially the same as operating
expenses

Advantages of Accounting : Accounting represents Financial Position /

Assistance to Manager / Replaces Memory Benefits in Comparison / Benefits in
Calculation of Tax Liabilities / Benefits in Decision-Making / Serves as an
Evidence of Transaction / Maintenance of Records of a Business Establishment
of Financial Statements / Comparison of Results Decision Making / Evidence in
Legal Matters / Provides Information to Related Parties / Helps in Matters of
Taxation Valuation of Business .

Disadvantages of Accounting Expresses Information of Accounting in

terms of Money / Accounting Information is based on Estimates /
Accounting Information may be Biased / Recording of Fixed Assets at
the Original Cost / Accounts Manipulation / Money as a Measurement
Unit changes in Value / Accuracy is Not Guarantee / Accounting
Disregards Qualitative Element: Can be Costly for a Small Firm /
Privacy of firm

Money Measurement Concept: Only those transactions, which can be

expressed in monetary terms, are recorded in accounting though their
quantitative records may also be kept. All business transactions should be
expressed only in money. Thus transactions, which cannot be expressed in
money, will not be recorded in accounting books. Thus, labour-management
relations, sales policy, labour unrest, effectiveness of competition etc., which are
of vital importance to business concern, do not find place in accounting. Another
limitation of this concept makes the assumption that the money value is
constant. It is contrary to fact as there are fluctuations in the money value. For
instance, a land, purchased for Rs 10,000 in 1980, may cost four or five times in
2004. This is because of fall in money value

Going Concern Concept: This concept relates with the long life of the
business. A business is intended to continue for an indefinitely long period. For
all practical purposes, a business firm comes under going concern concept, when
there is no evidence to the contrary. All firms that continue to operate on a
profitable footing are treated as going concerns. Accordingly, continuity of
activity is assumed, thus accounting reports are fashioned as a going concern,
just as against liquidation. The current disposal value is irrelevant for a
continuing business. Thus under this assumption fixed assets are recorded at
original cost and are depreciated in a proper manner. In Balance Sheet market
price of fixed assets are not considered. While preparing final accounts, record is
made for outstanding expenses and pre-paid expenses with the assumption that
the business will continue.

Accounting Period Concept: Accounting is a continuous process in any business

undertaking. Every businessman wants to know the result of his investment and
efforts at frequent intervals. Accountants choose some shorter period to
measure the result.
Therefore, one year has been, generally, accepted as the accounting period. It
may be 3 months, 6 months or 2 years also. This period is called accounting
period. Financial period chosen, in this regard, should be neither too long nor too
short. Closing day of the accounting period is known as accounting date. At this
date, accountant prepares income and position statements, shows the business
operations, brings the changes of positions since the construction of last
statements. The financial reports prepared facilitate to make good decision,
corrective measures, expansion etc. On the basis of income and position
statement, financial position and earning capacity of one year can be compared
with another. Their comparison helps the business for expansion and the
outsiders to draw various conclusions. One year accounting period is recognized
by law and the taxation is assessed annually. Reports to the outsiders are
provided on this accounting.

Benefits of a Budget:
Prepare for emergencies: You never know what can come up in the
course of doing business, so just as in personal life, it's important to plan
for the unexpected in business. A budget can help you set aside money in
the event of an emergency so you don't have to grab funds from some
other part of business operations instead.
Attract investors: Investors want to see that a company has their
dollars accounted for. A well-formed budget shows organization and a
commitment to the business that an owner without a budget may not
showcase. When an investor sees budget sheets and can understand how
much money the company anticipates bringing in and what its expenses
are, he or she may then have more confidence in investing.
Set sales goals: Some expenses are associated with having a sales team
or sales processes, and the budget can account for these. The budget can
also include how much sales you expect the business to earn in a certain
timeframe. With these items in place, you can set sales goals that align
with the budget, adjusting as needed later on.
Meet financial goals: Every company should have financial goals that, if
reached, means the company did well for the year and can continue
operations as normal or even expand as needed. Without a budget in
place, a business owner may not have an idea of how the company is
doing and only realize after the year is over that the company isn't
making a profit. A budget can keep a business owner and all stakeholders
on track to meet goals because there is a better awareness of where the
money is coming in and being spent.
Pay off debt: Paying off debt is a major benefit of having a budget. A
budget should include line items for each expense, with current debt
being just one of them. As long as a business owner follows the budget
and accounts for the monthly or quarterly debt payments, then they
should be able to pay the debt off promptly.
Easily prepare taxes: Whether you do business taxes yourself or hire a
professional, having a budget can make it easier to complete this process.
For example, you can invest in tax preparation software or have someone
on retainer who can file taxes for you. Your budget will make their process
go faster too, potentially saving you money.
Make large financial decisions : Most business owners are responsible for
larger business decisions that will impact the money moving into and out
of the company. With a budget, you will likely find it easier to make
necessary decisions like how much you can afford to increase salaries, if
bonuses can be available for team members, what benefits you can offer
employees or if there is the opportunity to increase operations

Creditors are parties to whom the business is liable to pay. Eg: Credit Purchases or any loan amount
which is yet to be paid will be shown in the Balance sheet in the liabilities side under creditors.

Margin of safety = Present Sales – BEP sales. Business can use the Margin of safety to determine
how far a company's or project's sales can drop before losing money.
A variable expense changes in proportion to how much a company produces or sells. Variable costs
increase or decrease depending on a company's production or sales volume—they rise as production
increases and fall as production decreases. Eg: Electricity, Packing Material, Raw material Cost etc.

Personal Account These accounts types are related to persons. These persons may be natural
persons like Raj’s account, Rajesh’s account, Ramesh’s account, Suresh’s account, etc. These
persons can also be artificial persons like partnership firms, companies, bodies corporate,
an association of persons, etc.
For example – Rajesh and Suresh trading Co., Charitable trusts, XYZ Bank Ltd, C company
Ltd, etc. There can be personal representative accounts as well. For example – In the case of
Salary, when it is payable to employees, it is known how much amount is payable to each of the
employee. But collectively it is called as ‘Salary payable A/c’. Rule for this Account Debit
the receiver. Credit the Giver.
Real Accounts: These account types are related to assets or properties. They are further
classified as Tangible real account and Intangible real accounts. Tangible Real Accounts
These include assets that have a physical existence and can be touched. For example – Building
A/c, cash A/c, stationery A/c, inventory A/c, etc.
Intangible Real Accounts : These assets do not have any physical existence and cannot be
touched. However, these can be measured in terms of money and have value. For Example –
Goodwill, Patent, Copyright, Trademark, etc. Real Account Rules Debit what comes into the
business. Credit what goes out of business.
For Example – Furniture purchased by an entity in cash. Debit furniture A/c and credit cash
A/c.

Nominal Account: These accounts types are related to income or gains and expenses or losses.
For example: – Rent A/c, commission received A/c, salary A/c, wages A/c, conveyance A/c, etc.
Rules : Debit all the expenses and losses of the business. Credit the incomes and gains of
business. For Example – Salary paid to employees of the entity. Salary A/c will be debited
when the expenses are incurred. Whereas, when an entity receives any interest, discount, etc
these are credited whenever these are received by the entity.

Particular
Capital Expenditure Revenue Expenditure
s

Capital Expenditure is incurred for

Revenue Expenditure is incurred for the
Nature the acquisition or erection of a
day to day running of the business.
fixed asset.

Revenue Expenditure is incurred for

Capital Expenditure is incurred for
maintenance of earning capacity i.e. for
Capacity the purpose of increasing the
keeping the assets in an efficient working
earning capacity of the business.
order.

Capital Expenditure yields benefit Revenue Expenditure yields benefit for a

Benefit
normally over a long period. maximum period of one year.

Capital Expenditure is not written

Profit & Revenue Expenditure is written in Trading
in Trading or Profit & Loss
Loss or Profit and Loss Account.
Account.

Revenue Expenditure is not written in

Balance Capital Expenditure is written in
Balance Sheet, these effected profit & loss
Sheet Balance Sheet under Fixed Assets.
account.

Current Liability: Current liabilities are a company's short-term financial obligations that are due
within one year or within a normal operating cycle. Example: Accounts Payable/ Bank overdraft /
Bills Payable / Short term loans and advances. (1mark theory plus 1 mark for example)
General Reserve: General reserve is referred to as the reserve fund that is created by keeping aside
a part of profit earned by the business during the course of an accounting period for fulfilling various
business needs like meeting contingencies, offsetting future losses, enhancing the working capital,
paying dividends to the shareholders, etc.
General reserves are created without any specific purpose and can be used for the business in
various ways. It is also known as free reserve, which means that the creation of a general
reserve is not mandatory for the business, but a company can create a general reserve only
when there is sufficient profit earned by the business

Margin of Safety: MOS is the difference between actual sales and break even sales. In other words,
all sales revenue that a company collects over and above its break-even point represents the MOS. For
example, if actual sales for the month of January 2022 are Rs2,50,000 and the break-even sales are
Rs1,50,000, the difference of Rs1,00,000 is the margin of safety. (1mark theory plus 1 mark for
example)
Advantages of Accounting: Maintenance of business records / Preparation of financial statements /
Comparison of results / Decision making / Evidence in legal matters / Provides information to related parties /
Helps in taxation matters / Valuation of business / Replacement of memory

COMPARISO
TRADE DISCOUNT CASH DISCOUNT
N
Meaning Trade Discount refers to the deduction Cash discount implies the allowance granted
given by the supplier to the customer in the to the customers by the supplier on the invoice
catalog price of the goods. price, for immediate payment.
Basis Based on the amount of purchase or sales Based on time, i.e. Period of payment
Fixed Yes May or May not be fixed
Percentage
Why Allowed? Because of business considerations like As an incentive or motivation, for payment
trade practices, orders in bulk, etc within a specified time.
Objective To increase sales in bulk quantity. To encourage early and prompt payment.
Allowed on Both Cash and Credit Transactions. Only on cash payments.
Entry Not entered in the books of accounts. Appears as an expense in Income Statement.
Deduction Deducted from the invoice value or Deducted from the invoice value of goods.
catalog price of the goods.

Need for a cost Accountant in an organization:

Ascertainment of the cost per unit of the different products that a business concern manufacturers.
To correctly analyze the cost of both the process and operations.
Disclosure of sources for wastage of material, time, expenses or in the use of the equipment and the
preparation of reports which may be necessary to control such wastage.
Provide requisite data and help in fixing the price of products manufactured or services rendered.
Determination of the profitability of each of the products and help management in the maximization of
these profits.
Exercise effective control of stocks of raw material, work-in-progress, consumable stores, and finished
goods so as to minimize the capital invested in them.
Present and interpret data for management planning, decision-making, and control.
Help in the preparation of budgets and implementation of budgetary control.
Aid management in the formulation and implementation of incentive bonus plans on the basis of
productivity and cost savings.
Organization of cost reduction programmes with the help of different departmental managers.
To provide specialized services for cost audit in order to prevent errors and frauds.
Determination of costing profit or loss by linking the revenues to costs of those products or services by
selling which the revenues have arisen.
Every organisation wants to determine the position of the business at the end of an accounting period
and for that, each transaction will be recorded by the accountants by taking proper care.
But there will always be certain transactions which will contain errors that are generated during the
recording of the transaction.

Difference between Capital Expenditure and Revenue Expenditure

A business organisation incurs expenditures for various purposes during its existence. Some of these
expenditures are meant to bring in more profits for the organisation in the long-term, while some
expenditures are for the short-term.
The main reason for incurring expenditure is to increase the efficiency of the business and drive in
higher returns. Based on the nature of the expenditure, they are categorised as capital expenditure and
revenue expenditure
Meaning of Capital Expenditure
The expenditures that are incurred by an organisation for long-term benefits are known as capital
expenditures. These expenditures serve the purpose of increasing the capacity or capabilities of the
long-term asset by either enhancing or adding new assets to the organisation.
These expenditures are added on the asset side of the balance sheet. It is done mostly on assets such as
land, equipment, furnishings, or vehicles that help to drive benefits for the organisation by increasing
the operating capability.
Meaning of Revenue Expenditure
Revenue expenditure is referred to as the expenditure incurred by an organisation to manage the day-
to-day functions of a business, which include employee wages, inventory, rent, electricity, insurance,
stationery, postage, and taxes.
These are the expenditures that neither help in the creation of assets nor in reducing the liabilities of a
business. It is recurring in nature and very essential to maintain the daily operations of a business or an
organisation.
Revenue expenditures can be divided into two categories
1. Expenditures for generating revenue for a business: These are the expenditures that are essential
for meeting the operational cost of a business, hence these are classified as operating expenses.
2. Expenditures for maintaining revenue-generating assets: Such expenses are incurred by business
towards repair and maintenance of the assets of an organisation to keep them in working condition
without enhancing their lifespan. Such expenses can be towards repairing and repainting of assets.
Let us look into the key differences between capital expenditure and revenue expenditure to develop a
clear understanding of their functions in a business.
Capital Expenditure Revenue Expenditure

Definition

Expenditure incurred for acquiring assets, to Expense incurred for maintaining

enhance the capacity of an existing asset that results the day to day activities of a
in increasing its lifespan business

Tenure

Long Term Short term

Value Addition
Enhances the value of an existing asset Does not enhance the value of an
existing asset

Physical Presence

Has a physical presence except for intangible assets Does not have a physical presence

Occurrence

Non-recurring in nature Recurring in nature

Availability of Capitalisation

Yes No

Impact on Revenue

Do not reduce business revenue Reduce business revenue

Potential Benefits

Long-term benefits for business Short-term benefits for business

Appearance

Appears as assets in the balance sheet and some Always appears in the income
portion in the income statement statement