Unit III
Preparation Final Accounts
Q1) What is the purpose of preparing Final Accounts?
A1) The final account is the account prepared by the Joint Stock Company at the end of the fiscal year. The purpose of creating a final account is to provide a clear picture of the financial situation of the organization to its management, owners or other users of such accounting information.
Final account preparation involves preparing a set of accounts and statements at the end of the fiscal year.
- Trading and profit and loss accounts
- Balance sheet
- Profit and loss appropriation account
- Purpose of Final Account preparation
The final account is prepared for the following purposes:
- To determine the profit and loss incurred by the company within a certain financial period
- To determine the financial status of the company
- To serve as a source of information to inform users of accounting information (owners, creditors, investors and other stakeholders) about the solvency of the company.
Trading account
The results of the purchase and sale of goods are known as the trading account. This sheet is provided to show the difference between the sales price and the cost price. It is prepared to show the trading results of the business i.e. The total profit or total loss maintained by the business. It records the direct costs of the business company.
J.R.According to Batlibboi,
The trading account shows the results of buying and selling goods. When we prepare this account, the general establishment costs are not taken into account and only the transaction of goods is included."
Profit and loss accounts
This account is prepared to check the net profit/loss and fiscal year expenses of the business during the fiscal year. It records the indirect expenses of the business company like rent, salary, and advertising expenses. Profit and loss a/C includes expenses and losses and gains and losses incurred in business other than the production of goods and services.
Balance sheet
The balance statement shows the financial status of the business at a specific date. The financial status of a business is discovered by aggregating its assets and liabilities on a specific date. The excess of assets over liabilities represents the capital sunk into the business and reflects the financial health of the enterprise.
Now it is known as a statement of the financial status of the company.
Q2) What all expenses come under the head of trading A/C?
A2) Trade and manufacturing operating companies deal with the sale and purchase of goods. Therefore, only the manufacturing and trading entities prepare the trading account. Service providers do not prepare for this.
Advantages of preparing a trading account format
- It is a very important statement from the point of view of the cost of goods. By preparing a trading account, an entity may take a decision to continue or discontinue a particular product, which helps to obtain maximum profit or reduce losses.
- With the help of a trading account, the sales tax authority can, in accordance with the sales tax declaration filed by the business,. It also helps the excise duty authorities to assess the excise duty of a business enterprise.
- The management, having in mind the market competition, determines the price of the product with the help of a trading account.
Items in trading account format
The trading account contains the following details:
- Details of raw materials, semi-finished goods and finished products, opening stock.
- Close inventory details of raw materials, semi-finished products, and finished products.
- Total purchase of goods less purchase return.
- Total sales of goods less sales return.
- All direct costs associated with the purchase or sale or manufacture of goods.
Item of income (Cr.Side)
- Less sales return than total sales of goods
- Close the stock of the product.
- Expenditure item (Doctor) side
Item of expenditure (Dr.Side)
- Opening stock
- Total purchase of goods less purchase return
- All the direct cost like carriage interior & freight cost, rent, electricity and power cost, wages for godown or factory, packing cost, etc. for workers and supervisors.
Notes
The trial count will not be displayed on the close. But, firstly, we need to show the amount of closing shares on the income side of the trading account, and secondly, on the balance sheet under current assets.
We value closing inventory at either lower cost or market price.
On the day of preparation of the trading account, we value the physically available closed shares.
However, the trading account can also be prepared in horizontal form, but the content remains the same.
Trading Account Format
Particulars | Amount | Particulars | Amount |
To opening stock | Xxx | By sales | Xxx |
To purchase | Xxx | Less: Returns | Xxx |
Less: returns | Xxx | By Closing stock | Xxx |
To direct expenses: | Xxx | By Gross loss c/d |
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Freight & carriage | Xxx |
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Custom & insurance | Xxx |
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Wages | Xxx |
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Gas, water & fuel | Xxx |
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Factory expenses | Xxx |
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Royalty on production | Xxx |
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To Gross profit c/d | Xxx |
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Q3) Draw the format of P/LA/C.
A3) All companies generally prepare profit and loss accounts/statements at the end of the year to gain visibility of income, revenue, expenses, and losses incurred in a certain range of periods. It is important to prepare a profit and loss statement because this information helps organizations make the right business decisions, such as where to cut costs, from where the business can generate more profit, and which parts of the business are suffering from losses.
- Profit and loss accounts / statements
- Types of profit and loss
- Gross profit/gross loss
- Profit / loss
Trading account is prepared to check gross profit/loss while profit and loss account is created to check profit and loss/net loss.
Profit and loss accounts are made to check the annual profit or loss of a business. This account only shows overhead. All items of income and expenses, whether cash or non-cash, are considered in this account.
Only revenue or expenses related to the current period are debited or credited to the profit and loss account. The profit and loss account starts with gross profit on the credit side and, if there is a total loss, appears on the debit side. Items not displayed in the profit and loss account format
Drawing: the drawing is not the company's expense. Therefore, we debit it to capital a/c, and not to profit and loss a/c.
Income tax: for a company, income tax is an expense, but for a sole proprietor, it is his personal expense. Therefore, we debit it to the capital A/C.
Discounts: as we know, discounts are of two types–trade discounts and cash discounts. We deduct the trade discount from the amount charged and therefore do not show it in the account books. On the other hand, if the customer pays the amount on a certain date, a cash discount will be possible. We view cash discounts in account books. Therefore, we debit it to the profit and loss account.
Bad debt: it is because of the customer and the amount he does not pay it. We debit this amount to profit and loss a/c in the event that preparations have already been made for a bet that is worse than it is initially written off from it. When bad loans are recovered, it is again. Now it is not credited to the account of the party, but recovered account should be credited to the bad debt and is written on the credit side of the profit and loss account
Profit and Loss Account Format
Particulars | Amount | Particulars | Amount |
To Gross loss b/d | Xxx | To Gross profit b/d | Xxx |
Management expenses: | Xxx | Income: | Xxx |
To salaries | Xxx | By Discount received | Xxx |
To office rent, rates, and taxes | Xxx | By Commission received | Xxx |
To printing and stationery | Xxx | Non-trading income: | Xxx |
To Telephone charges | Xxx | By Bank interest | Xxx |
To Insurance | Xxx | By Rent received | Xxx |
To Audit fees | Xxx | By Dividend received | Xxx |
To Legal charges | Xxx | By Bad debts recovered | Xxx |
To Electricity charges | Xxx | Abnormal gains: | Xxx |
To Maintenance expenses | Xxx | By Profit on sale of machinery | Xxx |
To Repairs and renewals | Xxx | By Profit on sale of investments | Xxx |
To Depreciation | Xxx | By Net Loss(transferred to Capital A/c) | Xxx |
Selling distribution expenses: |
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To Salaries | Xxx |
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To Advertisement | Xxx |
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To Godown | Xxx |
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To Carriage outward | Xxx |
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To Bad debts | Xxx |
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To Provision for bad debts | Xxx |
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To Selling commission | Xxx |
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Financial expenses: |
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To Bank charges | Xxx |
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To Interest on loan | Xxx |
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To Discount allowed | Xxx |
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Abnormal losses: | Xxx |
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To Loss on sale of machinery | Xxx |
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To Loss on sale of investments | Xxx |
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To Loss by fire | Xxx |
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To Net Profit(transferred to capital a/c) | Xxx |
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TOTAL |
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Q4) Explain any six types of adjustment in final Account.
A4) Types of adjustment entry for the final account
- Closing stocks:
The value of the closing stock is checked at the end of the fiscal year, so it is displayed as an adjustment. It must be credited to the transaction a/c and displayed on the asset side of b/S.
The adjustment entry is:
Closing stock a/c ------ Dr.
To trade A / c
DR Trading account and balance sheet CR
Rs | |
| By Sales |
| By Trading Stock |
Balance sheet
Liabilities | Rs | Assets | Rs |
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| Closing Stock |
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2. Unpaid expenses:
These are expenses incurred in the fiscal year, but no payments have been made. Any unpaid or unpaid expenses will be added to such expense a/c in P&L a/c and will be displayed as current liability in b/S.
For example, monthly rent in May 2002 Rs. 1,000 remains unpaid. A calendar year is an accounting year.
Adjusting entries:
Rent account Dr. Rs.1000
To Outstanding Rent a/c Rs. 1,000
Dr Profit and loss accounts Cr
Particulars | Amount | Particulars | Amount |
TO Rent Account Add: Outstanding | [11 month rent] [December] | 11,000 1,000 |
12,000 |
Balance sheet
Liabilities | Rs | Assets |
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Outstanding Expenses: Rent |
1,000 |
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3. Prepaid Expenses
These are the costs paid, but part of the amount paid extends to the next year. It is also called" expiring expenses". The prepaid amount paid should be deducted from such expenses and displayed as current assets in the B/S.
For example, Rs premium a total of 2,400 people were paid on July 1, 2002. A calendar year is an accounting year. The annual premium is paid for 1 month, so the 6-month premium concerns half of the current year and the other half the following year.
Hence Rs. 1,200 must be treated as an upfront payment, deducted from the premium paid and displayed as an asset on b/S.
Adjusting entries:
Prepaid insurance a / c Dr Rs. 1, 200
To Premium A / c Rs. 1, 200
Profit and Loss Account
Particulars | Amount | Amount | Particulars | Amount |
To Insurance Premium a/c Less: Prepaid insurance | 2,400 1,200 | 1,200 |
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Balance Sheet
Liabilities | Rs | Assets | Rs |
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| Prepaid Insurance | 1,200 |
4. Accrued income:
It is an income that has already been earned [i.e. the service has already been rendered], but no money has been received. For example, interest on investments accrued Rs. 1,200.
Interest in the current year is due to the end of the year. That amount can actually be received in the next year. Currently, it represents income, which has become accounts receivable or accrued. Therefore, P&L is credited to a/c, IS accounts receivable and appears as an asset in b/S.
Adjusting entries:
Accrued interest a / c Dr. Rs. 1,200
To be interested in a / c Rs. 1,200
Profit and Loss Account
| By Interest on investment Add: Interest accrued | …… 1,200 |
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Balance Sheet
Liabilities | Rs | Assets | Rs |
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| Interest accrued | 1,200 |
5. Income received in advance:
These are the income received during the current year, but part of the amount received is related to the following year. Such amounts must be deducted from the total amount received in P & L A / C and displayed on the debt side of B / S, which represents the amount that the business is obliged to return.
For example, business concerns have received a three-year apprenticeship premium equivalent to Rs.6, 000. Rs in this amount.2, 000 IE, 1/3 of Rs.6, 000 is for the current year and must be credited to P&L a/c as income. And balance Rs. As business is obliged to return 4, 000 represents responsibility.
Adjusting entries:
Apprentice premium A / c Dr Rs. 4000
To Apprentice premium received in advance Rs. 4000
Profit and Loss Account
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| Rs | Rs |
| By Apprentice Premium Less: Received in advance | 6,000 4,000 |
2,000 |
Balance Sheet
Liabilities | Rs | Assets | Rs |
Apprentice Premium received in advance | 4,500 |
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6. Depreciation of assets:
Depreciation implies a decrease or decrease in the value of an asset due to its constant use. It may also occur due to wear and tear, the passage of time and obsolescence. It's a loss to business.
It is usually calculated at a certain percentage to the value of the asset, and so the amount obtained is shown first on the debit side of the P & L A/C, and then subtracted from the original value of the asset of B/s.
For example, a business has furniture worth Rs. At the end of the year 50, 000 it is depreciated by 5%.
Adjusting entries:
Depreciation A / c Dr Rs. 2,500
To Furniture A / c to Rs. 2,500
[5% Rs 50,000 = 2,500]
Profit and Loss Account
Particulars | Amount | Particulars | Amount |
To Depreciation a/c Furniture | 2,500 |
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Balance Sheet
Liabilities | Rs | Assets |
| Rs |
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| Furniture Less: Depreciation | 50,000 2,500 |
47,500 |
Q5) Show the adjustments of Bad Debts in Final A/C.
A5) Debt represents money from the debtor [i.e., the uncollected portion of the credit sale]. When a debt becomes irretrievable, it becomes a bad debt and is treated as a loss. The amount of non-performing loans is debited to P&L a/c and deducted from the various debtors of B/S.
For example, a trader's ledger balance on sundry debtors shows Rs with 20,000. 1,000 are estimated to be unrecoverable.
Adjusting entries:
Bad debts a / c Dr Rs. 1,000
To Sundry debtor a / c to Rs. 1,000
a) Provision for bad and doubtful debt:
Every business has a lot of trading through margin trading. This gives rise to a significant amount of book debts or debtors. But 100% of these debts are rarely recovered.
Therefore, it would be necessary to bring down the balance of the debtor to it true position. The usual practice is to calculate such a bad debt at a certain rate, based on the past experience of the debtor. It is called reserves or reserves for doubtful debts.
However, the allowance for bad loans and bad debt is calculated on good debt, that is, after deducting previously unadjusted bad loans.
For example:
At the end of the year the sundries debtors of traders stood in the Rs.21, 000. It is estimated to be Rs. 1,000 is written off as bad loans and a 5% allowance is created for bad debt.
Adjusting entries:
Bad Debts a/c Dr. Rs. 1,000
To Sundry Debtors a/c Rs. 1,000
To Profit and Loss a/c Dr. Rs. 2,000
To Bad Debts a/c Rs. 1,000
To Provision for Doubtful Debts 1,000
Profit and Loss Account
| Rs |
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TO Bad Debts To Reserve for doubtful Debts | 1,000 1,000 |
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If there is an old provision for doubtful debts, it should be adjusted [deducted] against the new provision.
Balance Sheet
Liabilities | Rs | Assets | Rs |
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| Sundry Debtors Less: Bad Debts
Less: Provision for Doubtful Debts | 21,000 1,000 |
19,000 |
20,000 | ||||
1,000 |
b) Provision for discounts to debtors:
Cash discounts are allowed to debtors to prompt quick payments. After providing bad loans and bad debts, the debtor's balance represents the debt from a healthy party.
They may pay their dues on time and try to take advantage of the acceptable cash discounts themselves. Therefore, this discount should be expected and offered. It is, therefore, the usual practice in business is to offer debtors discounts at a certain percentage on good debt.
For example:
Suppose a trader has various debtors equivalent to rs.20, 000 and he estimates that a provision for a discount of 5% is desirable, after a provision of 2% for bad debts. Then about healthy debt, i e a provision of 19,000 at 2% has been made as a reserve for debtors ' discounts.
Adjusting entries:
Profit and Loss a/c Dr. Rs.380
To Reserve for Discount on Debtors a/c Rs.380
Profit and Loss Account
| Rs |
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To ad Debts To Reserve for Doubtful Debts To Reserve for Discount on Debtors |
1,000 380 |
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Balance Sheet
Liabilities | Rs | Assets |
| Rs |
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| Sundry Debtors Less: Provision for Doubtful on Debts
Less: Provision for Doubtful Debts | 20,000 1,000
19,000 380 |
18,620 |
Q6) How are books maintained in electronic mode?
A6) Maintenance of books in electronic mode
The second note to Section 128 of the CA, 2013, allows the company to store such account books or other relevant papers in electronic mode in a prescribed manner Rule 3 of the company (account) rules stipulates the way accounts are held in electronic mode in 2014.
According to the rules:
- Account books and other related books and papers maintained in electronic mode will remain accessible in India for further reference.
- The account books and other related books and papers contained in sub-rule(1) shall be fully retained in the form originally generated, transmitted or received, or in a form that accurately presents the information generated, transmitted or received, and the information contained in the electronic records shall be complete and unaltered.
- The information received from the branch must be kept in a manner that does not change and indicates the information received from the branch
- Information in electronic records of documents may be displayed in an easy-to-read format.
- If an appropriate system exists as the Audit Committee for the storage, retrieval, display or printing of electronic records, or as the board of Directors deems appropriate, such records shall be disposed of or unavailable unless permitted by law.
- The company must be faithful with the registrar on an annual basis at the time of submission of financial statements:
(a) Name of the service provider;
(B) Internet Protocol address service provider;
(C) Location of the service provider, if applicable）
In 1956, there was no specific provision for the maintenance of electronic mode books. However, in the Registrar of the enterprise there were provisions for the submission of electronic records containing financial statements in electronic mode. Section 610E provided that all provisions of the Information Technology Act 2000 on electronic records, including the manner and form in which electronic records are filed, apply or relate to electronic records under Section 610B, unless they are inconsistent with this law.
Q7) Define Form and content of financial statements
A7) Form and content of financial statements
Section 129 of the CA (1), 2013 requires that the financial statements of the Company shall be
- a true and fair understanding of the company's situation;,
- Obeying with the rules of accounting standards notified under Section 133;
- a form or form provided to a company of a different class or class of Schedule III;
This subsection shall not apply to insurance companies or banking companies or companies engaged in generating or supplying electricity, or to any other class of companies whose forms of financial statements are specified in or under the law governing such class of companies.
Section subsection(5)129 further provides that, if the company's financial statements do not comply with the accounting standards set out in Subsection (1), without compromising the subsection-
In Paragraph (1), the Company shall disclose any deviations from financial statements, accounting standards, the reasons for such deviations, and any financial impact arising from such deviations.
Subsection (6) Section 129 prohibits the class from complying with the requirements of any of the rules made in this section or on its basis if the central government believes it is necessary to grant such exemptions in the public interest, on its own or by notice, for applications by the class or class of companies. Such exemption may be unconditionally or subject to the conditions specified in the notice.
A similar provision was in CA, 1956. Section 211 (1) all the company's balance sheets shall be true and fair to the company's situation at the end of the fiscal year, and in accordance with the provisions of this section, shall be in the form set forth in part I of Schedule VI, or in any form in which circumstances close to it are permitted, or in any other form that may be approved by the central government in general or in particular cases. If you do not agree to the terms of this agreement, you will be bound by the terms of this agreement. And in the preparation of the balance sheet must have, as far as possible, in the general instructions for the preparation of the balance sheet under the heading "notes" at the end of that part. :
Subsection (2) all profit and loss accounts of the Company shall give a true and fair view of the company's profit and loss for the fiscal year and, as mentioned above, shall be included in Part II of Schedule VI.
Nothing contained in this sub sections (1) and (2)does not apply to insurance companies or banking companies or companies engaged in generating or supplying electricity, or to companies of any other class whose forms of balance sheet and profit and loss accounts are set forth in the laws governing such classes of companies.
Subsection (3) the central government authorized to exempt any class of companies that comply with any of the requirements of Schedule VI, if it is deemed necessary to grant an exemption for the public interest, unconditionally or in accordance with the conditions specified in the notice by the Official Gazette.
Subsection (3A) mandated that all of the company's profit and loss accounts and balance sheets comply with accounting standards, and that if the company's profit and loss accounts and balance sheets do not comply with accounting standards, the company would disclose in its profit and loss accounts and balance sheets any deviations from accounting standards, the reasons for such deviations and any financial effects resulting from such deviations.
Subsection (4) the central government, with the consent of the board of Directors of the company, has authorized, by order, any of the requirements of this law to change in relation to the company in relation to the matters listed on the balance sheet or profit and loss account of the company for the purpose of adapting to the situation of the company.
Accounting standards
Section 129, 2013 of the CA requires that financial statements comply with accounting standards notified under Section 133 and Section 133 stipulates that the central government may prescribe accounting standards or an addendum to it, recommended by the Association of CPAs of India, after consultation with and consideration of recommendations made by the National Financial Reporting body.
Article 7 of the Company (Accounting Standards) Regulation (2014) stipulates that, as a transition provision, the accounting standards under the Company Act 1956 (i.e., the Company (Accounting Standards) Regulation, 2006) shall be considered as accounting standards until established by the central government under Article 133.
Similar provisions were provided in subsections of sections (3A), (3B) and (3C) 211, 1956 of CA.
Q8) What is the Format of financial statements?
A8) Format of financial statements
Section 129, 2013 of the CA requires that financial statements must be in a form or form that is provided to companies of different classes or classes of Schedule III.
Subsection (6) Section 129 prohibits the class from complying with the requirements of any of the rules made in this section or on its basis if the central government believes it is necessary to grant such exemptions in the public interest, on its own or by notice, for applications by the class or class of companies. Such exemption may be unconditionally or subject to the conditions specified in the notice.
Schedule III to the CA, 2013 provides that the disclosure requirements set out in this schedule are not replaced, in addition to the disclosure requirements set out in the accounting standards set out in the Companies Act, 2013. The additional disclosures specified in the accounting standard shall be made by a note to the account or an additional statement unless it is required to be disclosed on the surface of the financial statements. Similarly, all other disclosures required by the Companies Act shall be described in the account notes in addition to the requirements set out in this schedule. Such provisions were also found in Section 211 of the Companies Act and in Schedule VI, 1956.
However, Schedule III of the Companies Act 2013 also includes general instructions for the preparation of consolidated financial statements, and where the preparation of consolidated financial statements, i.e., consolidated balance sheets and consolidated income statements, is required, the Company shall comply with the requirements of this schedule that apply to the company in the preparation of the balance sheet and income statement. The consolidated financial statements shall also disclose information in accordance with the requirements set forth in the applicable accounting standards. It is also necessary to disclose certain additional information in the consolidated financial statements.
Section of Section(3)of the CA Section 129,2013 in addition to the financial statements it is provided on the basis of subsection(2)if the company has one or more subsidiaries, another statement containing in such a form that the salient features of the financial statements of its subsidiaries or subsidiaries may be prescribed. The central government may provide consolidation of the company's accounts by the prescribed method. Subsection description stipulates that for the purposes of this subsection, the word "Subsidiary" shall include quasi-company and joint venture.
Sub section (4)Section 129 applies to the preparation, adoption and audit of the financial statements of the holding company the provisions of this law stipulate that mutatis mutandis shall apply to the consolidated financial statements described in Subsection (3).
Rule 5, 2014 of the company (accounting) rules shall be in the form of a statement containing prominent features of the financial statements of subsidiaries or subsidiaries, affiliates or companies and joint ventures or ventures of the company under the first provision of Paragraph 3 of paragraph 129 of the Aoc-1.
Rule 6 stipulates the method of consolidation of accounting; it requires that the consolidation of the financial statements of the company must be carried out in accordance with the provisions of Schedule III of the law and the applicable accounting standards.
In 1956, there was no such provision in CA, which mandated the compulsory consolidation of financial statements by companies with subsidiaries.
However, Section 212 required a balance sheet of the holding company that contains certain matters relating to its subsidiaries and a sheet of the holding company for attachment to the balance sheet of the holding company
a) copy of the subsidiary's balance sheet,
b) Another set of the profit and loss account,
c) a copy of the board's report,
d) a copy of the auditor's report and
e) A statement of the interests of the holding company to the subsidiaries specified in Sub section(3).
However, subsection (2) (A), where it had subsidiaries, affiliates and joint ventures, was required to produce the balance sheet, income statement, auditor report and director report of the subsidiary in accordance with the requirements of CA, 2013. What is worth mentioning here is that CA, 2013 includes the definitions of "subsidiary" and "affiliate".
Q9) How to prepare financial statements?
A9) The preparation of monetary statements involves the method of aggregating accounting information into a uniform financial set. The completed financial statements are distributed to management, lenders, creditors and investors who use them to assess the performance, liquidity, and cash flow of the business.
Step 1: confirm receipt of vendor invoices
Compare and receive logs payable to all suppliers that may be charged. Comparing Accounts for expenses on invoices that have not been received.
Step 2: confirm the issue of customer invoices
Compare the shipment log to accounts receivable to ensure that all customer invoices have been issued. Issue an invoice that has not yet been prepared.
Step 3: generate unpaid wages
Accrues expenses for wages earned at the end of the reporting period, but not yet paid.
Step 4: calculate depreciation
To calculate depreciation and amortization for all fixed assets in accounting records.
Step 5: value stock
Perform a field inventory count to close, or use an alternative method to estimate the closing inventory balance. Use this information to derive the cost of the goods sold and record their amounts in accounting records.
Step 6: adjust your bank account
Perform bank adjustments, create journal entries, and record all the adjustments required to match accounting records to bank statements.
Step 7: post the account balance
Post all sub ledger balances to the general ledger.
Step 8: verify your account
Review the balance table account and use journal entries to adjust the account balance to match the corresponding details.
Step 9: check your finances
Print preliminary versions of financial statements and check them for errors. Repeat until all errors are corrected.
Step 10: generating income tax
Based on the corrected income statement, you will accrue income tax expenses.
Step 11: close the account
Close all sub ledgers for that period and open during the next reporting period.
Step I2: issue financial statements
Print the final version of the financial statement. Based on this information, write a footnote that accompanies the statement. Finally, prepare a cover letter explaining the key points of the financial statements. This information is then assembled into packets and distributed to a standard list of recipients.
Financial statements are the way companies tell their stories. Thanks to GAAP, there are four basic financial statements that everyone needs to prepare.
Q10) What are the Basic accounting assumptions?
A10) Basic accounting assumptions
Certain assumptions are utilized in the preparation of monetary statements. They are usually not particularly indicated because they are supposed to be abided. Disclosure is only necessary if they are not followed.
The following are generally accepted as basic accounting assumptions:
Ongoing concern
Organizations are usually considered to be of continuous concern, that is, to be in continuous operation in the near future. It is assumed that the organization has no intention, no need to stop operations or scale down.
Consistency
It is assumed that the accounting policy follows consistently from one period to another. Frequent changes are not expected.
Axial
Revenues and expenses are recorded when they are earned or incurred in the relevant period (not when money is received or paid).
Nature of accounting policy
Accounting policy refers to the method of applying these principles adopted by the organization in the preparation of accounting principles and financial statements.
There is no single list of accounting policies that apply in all situations. The different circumstances in which the organization operates make alternative accounting principles acceptable. The choice of the right accounting principles calls for a greater degree of judgment by the management of the organization.
The various standards of the Association of Certified Public Accountants of India, combined with the efforts of the government and other regulatory bodies, reduce the number of acceptable alternatives in recent years, especially in the case of legal entities, the continued efforts in this regard in the future may further reduce the number, but the availability of alternative accounting principles is not likely to be completely eliminated, with the different situations faced by the organization in mind.
Q11) From the following ledger balance presented by Sen. On 31st March, 2016 prepare a trading account:
Particulars | Rs | Particulars | Rs |
Stock (1-4-2015) Purchase Wages Carriage inwards Freight inward | 10,000 1,60,000 30,000 10,000 8,000 | Sales Returns inward Return outward Gas and Fuel | 3,00,000 16,000 10,000 8,000 |
Other information:
- Closing value of stock for 31st March, 2016. 20,000
- Unpaid wages reached Rs. 4,000
- Gas and fuel were paid in advance for Rs. 1,000
A11)
Trading account for the year ended 31st March, 2016
Dr Cr
Particulars | Rs | RS | Particulars | Rs | Rs |
To Opening Stock To purchase Less: Return outwards To wages Add: Outstanding To carriage inwards To freight inwards To Gas and fuel Less: Prepaid To Gross profit c/d |
1,60,000 10,000 | 10,000
1,50,000
34,000 10,000 8,000
7,000 85,000
| By Sales Less: Returns inward BY Closing Stock | 30,00,000 16,000 |
2.84,000 20,000
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30,000 4,000 | |||||
8,000 1,000 | |||||
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3,04,00 | |||||
3,04,00 | |||||
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Q12) From the following details presented by Thilak for the year 31st March, 2017, we will prepare a profit and loss account.
Particulars | Rs | Particulars | Rs |
Gross profit Rent paid Salaries Commissions (Cr.) Discount received Insurance Premium paid | 1,00,000 22,000 10,000 12,000 2,000 8,000 | Interest received Bad debts Provisions for bad debts(1-4-2016) Sundry debtors Buildings | 6,000 2,000 4,000 40,000 80,000 |
Adjustment:
- The unpaid salary reached Rs. 4,000
- The rent was paid for 11 months
- Interest expense reached Rs but was not received. 2,000.
- Prepaid insurance has reached Rs. 2,000
- Depreciating buildings by 10%
- Further bad debts reached Rs. Over 3,000 of 5%、
- The fee received in advance reached Rs. 2,000
A12)
Profit and Loss Account for the year ended 31st March, 2017
Dr. Cr.
Particulars | Rs | RS | Particulars | Rs | Rs |
To Rent Add: Outstanding (22,000x1/11) To Salaries Add: Outstanding To Insurance premium
Less: Prepaid insurance To Provision for bad and doubtful debts(closing)
Add: Bad debts Add: Further bad debts
Less: Opening provisions for bad and doubtful debts To Depreciate on building (80,000 x 10%)
To Net profit (transferred to capital A/c)
| 22,000 2,000 |
24,000
14,000
6,000
2,900 8,000 | By Gross profit b/d By Commission
Less: Received in advance By Discount received By interest received Add: Accrued | - 12,000 2,000 | 1,00,000
10,000 2,000
8,000
|
10,000 4,000 | 6,000
2,000 | ||||
8,000 2,000 | |||||
1,900 2,000 3,000
| |||||
6,900
4,000 | |||||
| |||||
65,100 | |||||
1,20,000 | |||||
1,20,000 |
Working notes:
Debtors: 40,000
Less: further bad loans: 2,000: 38,000
Allowance for bad and bad debt of 5%: 38,000x5 % =Rs. 1,900
Q13) As of 31st December, 2017, from the balance below, prepare a profit and loss account.
Particulars | Rs | Particulars | Rs |
Gross profit Salaries Office rent paid Advertisement | 50,000 18,000 12,000 8,000 | Rent received Discount received Carriage outwards Fire insurance premium | 2,000 3,000 2,500 6,500 |
Adjustment:
- Rent accrued, but not yet received Rs. 500
- Fire insurance premiums are prepaid in the range of Rs. 1,500
- Offer the manager's Commission at 10% of the profit before meeting such a commission.
A13)
Dr. Trading and P/L Ac Cr.
Particulars | Rs | RS | Particulars | Rs | Rs |
To Salaries To Office rent To Advertisement To Carriage outwards To Fire insurance premium Less: Prepaid To Manager’s commission To Net profit (transferred to capital account) |
6,500 1,500 | 18,000 12,000 8,000 2,500
5,000 1,000
9,000 | By Gross profit b/d By Rent received Add: Rent accrued By Discount received |
2,000 500 | 50,000
2,500 3,000
55,500 |
| |||||
55,500 |
Profit and Loss Account for the year ended 31st December, 2017
Dr. Cr.
Particulars | Rs | Rs | Particulars | Rs | Rs |
To Salaries To Office Rent To Advertisement To Carriage outwards To Fire insurance premium Less: Prepaid TO Manager’s commission To Net profit (transferred to capital account) |
6,500 1,500 | 18,000 12,000 8,000 2,500
5,000 1,000
9,000
55,500 | By Gross profit/d By Rent received Add: Rent accrued By Discount received |
2,000 500 | 50,000
2,500 3,000
55,500 |
| |||||
|
Working notes:
Manager’s Commission= Net profit before charging commission x Rate of Commission/100
Net profit = 55,500 – (18,000 + 12,000 + 8,000 + 2,500 + 5,000) = Rs. 10,000
Manager’s commission = 10,000x 10/100 = 1,000
Q14) Prepare a trading and profit and loss account from the following balances obtained from Siva books:
Particulars | Rs | Particulars | Rs |
Stock on 01.01.2016 Purchase Sales Expenses on purchase Bank charges paid | 9,000 22,000 42,000 1,500 3,500 | Bad debts Sundry expenses Discount allowed Expenses on sale Repairs on office furniture | 1,200 1,800 1,700 1,000 600 |
Adjustment:
- Closing value of the stock on 31st December, 2016 Rs 4,500
- The manager is entitled to receive a commission@5% of the net profit after providing such a commission.
A14)
Dr. Trading and Profit and Loss Account for the year 31st December, 2016 Cr.
Particulars | Rs. | Particulars | Rs |
To Opening stock To Purchase To Expense’s on purchase To Gross profit c/d
To Bank charges To Bad debts To Sundry expenses To Discount allowed TO Expense on sale To Repairs on office furniture TO Manager’s commission To Net profit (transferred to capital A/c) | 9,000 22,000 1,500 14,000 | By Sales By Closing stock
By Gross profit b/d | 42,000 4,500
|
46,500 | 46,500 | ||
3,500 1,200 1,800 1,700 1,000 600 200 4,000
| 14,000
| ||
14,000 | 14,000 |
Working Note:
Commission = Net profit before charging commissions x Rate of commissions/(100+ Rate of commissions) x 100
Net profit = 14,000 – (3,500 + 1,000+1,200+1,800+1,700+600) = Rs 4,200
Manager’s commission = 4,200 x 5/105 = Rs 200
Q15) From the following details, we have prepared Madhu's balance sheet and finished 31st March, 2018. During the final account creation, the following adjustments were made:
Particulars | Rs | Particulars | Rs |
Capital Drawings Cash in hand Loan from Bank Bank over draft Investment Bills receivables | 2,00,000 40,000 15,000 40,000 20,000 20,000 10,000 | Sundry creditors Bill payable Goodwill Sundry debtor Land and Building Vehicles Cash at bank | 40,000 20,000 60,000 80,000 50,000 80,000 25,000 |
- Unpaid debt: salary Rs. 10,000; pay Rupees. 20,000; interest on bank overdraft Rs. Bank loan Rs 3,000 and interest. 6,000
- Provide interest on capital@10%p.a.
- Bad debts reached Rs. Make provisions for bad debts of 10,000 and @10% to sundry debtors.
- Closing stock reached Rs. 1,20,000
- Provide depreciation on car @10%p.a.
- Net profit for the year reached Rs. 96,000 after considering all the above adjustments.
A15)
In the book of Madhu
Balance Sheet as on 31st March, 2018
Particulars | Rs | Rs | Particulars | Rs | Rs |
Capital Add: Net profit Add: Interest on capital
Less: Drawings Loan from bank
Add: Interest outstanding Bills payable Sundry creditors Bank overdraft Add: Interest outstanding
Outstanding liabilities Salaries Wages | 2,00,000 96,000 20,000 |
2,76,000
46,000 20,000 40,000
23,000
30,000
| Good will Land and Building Vehicles Less: Depreciation
Investment Stock in trade Sundry debtors Less: Bad debts
Less: Provision for bad and doubtful debts
Bills receivable Cash at bank Cash in hand |
80,000 8,000 | 60,000 50,000
72,000 20,000 1,20,000
63,000
10,000 25,000 15,000
|
3,16,000 40,000 | |||||
80,000 10,000 | |||||
40,000
6,000 | |||||
20,000 3,000 | 70,000
7,000 | ||||
10,000 20,000 |
| ||||
4,35,000 | |||||
| 4,35,000 |
Q16) The following balance was extracted from Thomas's book as of 31st March, 2018 additional information:
Particular | Rs | Paricular | Rs |
Purchase Return inward Opening stock Freight inwards Wages Investments Bank Charges Land Machinery Buildings Cash at bank Cash in hand | 75,000 2,000 10,000 4,000 2,000 10,000 1,000 30,000 30,000 25,000 18,000 4,000 2,11,000 | Capital Creditors Sales Return outwards | 60,000 30,000 1,20,000 1,000
2,11,000 |
- Close the stock by Rs. 9,000
- Provide depreciation@10% on machinery
- Interest accrued on the investment Rs. 2,000
Prepare a trading account, a profit and loss account and a balance sheet.
A16)
In the book of Thomas
Dr.Trading and Profit and Loss Account for the year ended 31st March, 2018 Cr.
Particulars | RS | Rs | Particulars | Rs | Rs |
To Opening stock TO Purchase Less: Return outward To Freight inwards To wages To Gross profit c/d
To Depreciation on machinery To Bank charges To Net profit (transferred to a/c) |
75,000 1,000 | 10,000
74,000 4,000 2,000 37,000 | By Sales Less: Return inward
By Closing stock
By Gross profit b/d BY Accrued interest on investment | 1,20,000 2,000 |
1,18,000
9,000
|
| |||||
| |||||
1,27,000 | 1,27,000 | ||||
3,000 1,000 35,000 |
37,000 2,000
| ||||
39,000 | |||||
39,000 |
Balance Sheet as on 31st March, 2018
Particulars | RS | Rs | Particulars | Rs | Rs |
Capital Add: Net profit Creditors | 60,000 35,000
|
95,000 30,000
| Land Building Machinery Less Depreciation Investment Add: Accrued interest Stock in trade Cash at bank Cash in hand
|
30,000 3,000 | 30,000 25,000
27,000
12,000 9,000 18,000 4,000
|
10,000 2,000 |
Q17) Below is a balance extracted from Nagarajan's book as of 31st March, 2016.
Particulars | Rs | Particulars | Rs |
Purchase Wages Freight inwards Advertisement Carriage outwards Cash Machinery Debtors Bills receivable Stock on 1st January, 2016 | 10,000 600 750 500 400 1,200 8000 2,250 300 1,000 25,000 | Sales Commission received Rent received Creditors Capital | 15,100 1,900 600 2,400 5,000
25,000 |
After adjusting for the following, we will prepare trading and profit and loss accounts for the year ending 31st March, 2016 and balance sheet as of that date:
- Fees received Rs in advance. 400
- Ads paid Rs in advance. 150
- Unpaid wages Rs. 200
- Stock at the end was Rs. 2,100
A17)
In the book of Nagrajan
Dr. Trading and Profit and Loss Account for the year ended 31st March, 2016 Cr.
Particulars | Rs | Rs | Particulars | Rs | Rs |
To Opening stock To Purchase TO Wages Add: Outstanding To Freight inwards To Gross profit c/d
TO Advertisement Less: Prepaid Advertisement To Carriage outwards TO Net profit (transferred to capital a/c) |
600 200 | 1,000 10,000
800 750 4,650 | By Sales By Closing stock
By Gross profit b/d By Commission received Less: Received in advance By Rent received |
1,900 400 | 15,100 2,100
|
500 150 | |||||
17,200 | 17,200 4,650 | ||||
350 400
6,000
|
1,500 600
| ||||
| |||||
| |||||
6,750 | 6,750 |
Q18) Consider the following balance extracted from Jain's book, as of 31st December, 2016. Prepare the final account.
Capital Debtors Creditors Purchase Sales Income tax of Jain paid Opening stock | 20,000 8,000 10,500 60,00 80,000 500 12,000 | Offices Salaries Establishment expenses Selling expense Furniture Cash at bank Miscellaneous receipt Drawings | 6,600 4,500 2,300 10,000 2,400 600 4,800 |
Adjustment
- Unpaid salaries for January, 2016 amounted to Rs. 600
- Furniture depreciate by 10% p.a.
- 5% p.a on interest on capital
- Stock for 31st December, 2016 Rs 14,000
A18)
In the book of Jain
Dr. Trading and profit and Loss Account for the year ended 31st Dec,2016 Cr.
Particular | Rs | Rs | Particular | Rs | Rs |
To Opening Stock To Purchase To Gross Profit c/d
To Office salaries Add: Outstanding To Establish expenses To Selling expenses To Depreciation on furniture (10,000 x 10%) To interest on capital (20,000 x 5%) To Net profit (transferred to capital a/c) |
6,600 600 | 12,000 60,000 22,000 | By sales By closing stock
By Gross Profit b/d By miscellaneous receipt |
| 80,000 4,000 |
94,000 |
94,000 | ||||
72,00 4,500 2,300 1,000
1000
6,600
| 22,000
600
| ||||
| |||||
22,600 | 22,600 |
Balance Sheet as on 31st December, 2016
Liabilities | Rs | Rs | Assets | Rs | Rs |
Capital Add: Net profit Add: Interest on capital
Less: Drawings 4,800 Income tax 500 Creditors Office salaries outstanding
| 20,000 6,600 1,100 27,600
5,300 |
22,300 10,500 600 | Furniture Less: Depreciation Stock in trade Debtors
Cash at bank | 10,000 1,000 |
9,000 14,000 8,000 2,400 |
| |||||
| |||||
33,400 |
Q19) Edward's books include: We will prepare his trading and profit and loss a/c for the year to 31st December, 2016 and ended the balance sheet for the day.
Debit balances | Rs | Credit balances | Rs |
Drawings Sundry debtors Coal, gas and water Return inward Purchase Stock on 1-11-2016 Travelling expenses Interest on loan paid Petty cash Repairs Investment | 5,000 60,000 10,500 2,500 2,56,500 89,700 51,250 300 710 4,090 70,000 | Capital Loan at 6% p.a. Sales Interest on investment Sundry creditors | 1,31,500 20,000 3,56,500 2,550 40,000
|
5,50,550 | 5,50,550 |
Adjustment:
- The closing price of stock was Rs. 1, 30,000 on 31th December, 2016.
- Create a 5% allowance for bad debt and bad debt to sundries debtor
- Create a provision at 2% for debtors discount
- Interest on the loan is postponed for 9 months.
A19)
In the books of Edward
Dr. Trading and Profit and Loss Account for the year ended 31st Dec, 2016 Cr.
Particulars | ₹ | ₹ | Particulars | ₹ | ₹ |
To opening stock To purchase To Coal, gas and water To Gross profit c/d
To travelling expenses To interest on loan paid To Repair To Provide Provision for bad and doubtful debts To Provision for Discount on debtors Net Profit (transferred to capital a/c)
|
300
900 | 89,000 2,56,500 10,500 1,27,300 | By sales Less: Returns inward By Closing stock
By Gross profit b/d By Interest on Investment | 3,56,00 2,500 |
3,54,500 1,30,000 |
| |||||
4,84,000 | |||||
4,84,000 | |||||
51,250
1,200
4,090 3,000
1,140
69,170
|
1,23,300 2,550
| ||||
1,29,850 |
|
| 1,29,850 |
Balance Sheet as on 31st December, 2016
|
Liabilities | ₹ | ₹ | Assets | ₹ | ₹ |
Capital Add: Net profit
Less: Drawings 6% Loan Add interest outstanding Sundry creditors
| 1,31,500 69,170 2,00,000 5,000 20,000 900 |
1,95,670
20,900 40,000 | Investments Stock in trade Sundry debtors Less: Provision for bad and doubtful debts( 60,000* 5/100) Less: Provision for discount on debtors (57,000*2/100) Pretty cash |
60,000
3,000
57,000 1,140
| 70,000 1,30,000
55,860 710 |
2,56,570 |
|
Q20) State with reasons whether the following statements are ‘True’ or ‘False’.
(1) Overhaul expenses of second-hand machinery purchased are Revenue Expenditure.
(2) Money spent to reduce working expenses is Revenue Expenditure.
(3) Legal fees to acquire property are Capital Expenditure.
(4) Amount spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged to the plaintiff’s land is Capital Expenditure.
(5) Amount spent for replacement of worn out part of machine is Capital Expenditure.
(6) Expense incurred on the repairs and white washing for the first time on purchase of an old building are Revenue Expenses.
(7) Expenses in connection with obtaining a license for running the cinema are Capital Expenditure.
(8) Amount spent for the construction of temporary huts, which were necessary for construction of the Cinema House and were demolished when the cinema house was ready, is Capital Expenditure.
A20)
(1) False: Overhaul expenses are incurred to put second-hand machinery in working condition to derive endurable long-term advantage. So it should be capitalised.
(2) False: It may be reasonably presumed that money spent for reducing revenue expenditure would have generated long-term benefits to the entity. It becomes part of intangible fixed assets if it is in the form of technical know-how and tangible fixed assets if it is in the form of additional replacement of any of the existing tangible fixed assets. So this is capital expenditure.
(3) True: Legal fee paid to acquire any property is part of the cost of that property. It is incurred to possess the ownership right of the property and hence a capital expenditure.
(4) False: Legal expenses incurred to defend a suit claiming that the firm’s factory site belongs to the plaintiff are maintenance expenditure of the asset. By this expense, neither any endurable benefit can be obtained in future in addition to that what is presently available nor will the capacity of the asset be increased. Maintenance expenditure in relation to an asset is revenue expenditure.
(5) False: Amount spent for replacement of any worn out part of a machine is revenue expense since it is part of its maintenance cost.
(6) False: Repairing and white washing expenses for the first time of an old building are incurred to put the building in usable condition. These are the part of the cost of building. Accordingly, these are capital expenditure.
(7) True: The Cinema Hall could not be started without license. Expenditure incurred to obtain the license is pre-operative expense which is capitalised. Such expenses are amortised over a period of time.
(8) True: Cost of temporary huts constructed which were necessary for the construction of the cinema house is part of the construction cost of the cinema house. Therefore such costs are to be capitalised.
Q21) State with reasons whether the following are Capital or Revenue Expenditure:
(1) Expenses incurred in connection with obtaining a license for starting the factory for Rs. 10,000.
(2) Rs. 1,000 paid for removal of Inventory to a new site.
(3) Rings and Pistons of an engine were changed at a cost of Rs. 5,000 to get fuel efficiency.
(4) Money paid to Mahanagar Telephone Nigam Ltd. (MTNL) Rs. 8,000 for installing telephone in the office.
(5) A factory shed was constructed at a cost of Rs. 1,00,000. A sum of Rs. 5,000 had been incurred in the construction of temporary huts for storing building material.
A21)
(1) Money paid Rs. 10,000 for obtaining license to start a factory is a capital expenditure. This is an item of expenditure incurred to acquire the right to carry on business.
(2) Rs. 1,000 paid for removal of Inventory to a new site is revenue expenditure. This is neither bringing enduring benefit nor enhancing the value of the asset.
(3) Rs. 5,000 spent in changing Rings and Pistons of an engine to get fuel efficiency is capital expenditure. This is an expenditure on improvement of a fixed asset. It results in increasing profit-earning capacity of the business by cost reduction.
(4) Money deposited with MTNL for installation of telephone in office is not expenditure. This is treated as an asset and the same is adjusted over a period of time against actual telephone bills.
(5) Cost of construction of building including cost of temporary huts is capital expenditure. Building is fixed asset which will generate enduring benefit to the business over more than one accounting period. Construction of temporary huts is incidental to the main construction. Such cost is also capitalised with the cost of building.
Q22) Good Pictures Ltd., constructs a cinema house and incurs the following expenditure during the first year ending 31st March, 2016.
1. Second-hand furniture worth Rs. 9,000 was purchased; repainting of the furniture costs Rs. 1,000. The furniture was installed by own workmen, wages for this being Rs. 200.
2. Expenses in connection with obtaining a license for running the cinema worth Rs. 20,000. During the course of the year the cinema company was fined Rs. 1,000, for contravening rules. Renewal fee Rs. 2,000 for next year also paid.
3. Fire insurance, Rs. 1,000 was paid on 1st October, 2015 for one year.
4. Temporary huts were constructed costing Rs. 1,200. They were necessary for the construction of the cinema. They were demolished when the cinema was ready.
Point out how you would classify the above items.
A22)
1. The total cost of the furniture should be treated as Rs. 10,200 i.e., all the amounts mentioned should be capitalised since without such expenditure the furniture would not be available for use. If Rs. 1,000 and Rs. 200 have been respectively debited to the Repairs Account and the Wages Account, these accounts will be credited to the Furniture Account.
2. License for running the cinema house is necessary, hence its cost should be capitalised. But the fine of Rs. 1,000 is revenue expenditure. The renewal fee for the next year is also revenue expenditure but pertains to the next year; hence, it is a prepaid expense.
3. Half of the insurance premium pertains to the year beginning on 1st April, 2016. Hence such amount should be treated as prepaid expense. The remaining amount is revenue expense for the current year.
4. Since the temporary huts were necessary for the construction, their cost should be added to the cost of the cinema hall and thus capitalised.
Q23) State with reasons, how you would classify the following items of expenditure:
1. Overhauling expenses of Rs. 25,000 for the engine of a motor car to get better fuel efficiency.
2. Inauguration expenses of Rs. 25 lakhs incurred on the opening of a new manufacturing unit in an existing business.
3. Compensation of Rs. 2.5 crores paid to workers, who opted for voluntary retirement.
A23)
1. Overhauling expenses are incurred for the engine of a motor car to derive better fuel efficiency. These expenses will reduce the running cost in future and thus the benefit is in form of endurable long-term advantage. So this expenditure should be capitalised.
2. Inauguration expenses incurred on the opening of a new unit may help to explore more customers. This expenditure is in the nature of revenue expenditure, as the expenditure may not generate any enduring benefit to the business over more than one accounting period.
3. The amount paid to workers on voluntary retirement is in the nature of revenue expenditure. Since the magnitude of the amount of expenditure is very significant, it may be better to defer it over future years.
Q24) Classify the following expenditures and receipts as capital or revenue:
(i) Rs. 10,000 spent as travelling expenses of the directors on trips abroad for purchase of capital assets.
(ii) Amount received from Trade receivables during the year.
(iii) Amount spent on demolition of building to construct a bigger building on the same site.
(iv) Insurance claim received on account of machinery damaged by fire.
A24)
(i) Capital expenditure.
(ii) Revenue receipt.
(iii) Capital expenditure.
(iv) Capital receipt.
Q25) Are the following expenditures capital in nature?
(i) M/s ABC & Co. Runs a restaurant. They renovate some of the old cabins. Because of this renovation some space was made free and number of cabins was increased from 10 to 13. The total expenditure was Rs. 20,000.
(ii) M/s New Delhi Financing Co. Sold certain goods on installment payment basis. Five customers did not pay installments. To recover such outstanding installments, the firm spent Rs. 10,000 on account of legal expenses.
(iii) M/s Ballav & Co. Of Delhi purchased a machinery from M/s Shah & Co. Of Ahmedabad. M/s Ballav & Co. Spent Rs. 40,000 for transportation of such machinery. The year ending is 31st Dec, 2015.
A25)
(i) Renovation of cabins increased the number of cabins. This has an effect on the future revenue generating capability of the business. Thus, the renovation expense is capital expenditure in nature.
(ii) Expense incurred to recover installments due from customer does not increase the revenue generating capability in future. It is a normal recurring expense of the business. Thus, the legal expenses incurred in this case are revenue expenditure in nature.
(iii) Expenses incurred on account of transportation of fixed asset are capital expenditure in nature.
