Professional Documents
Culture Documents
Brs Very Imp Notes and Format
Brs Very Imp Notes and Format
Capital expenditure occurs when a business gets a long-term advantage due to that expenditure.
It is usually incurred for the accusation of an asset. These expenditures do not occur in the regular
day to day transactions of the business.
Common examples
Revenue Expenditure
Expenditure which is not for increasing the value of fixed assets, but for running the business on a
day to day basis, is known as revenue expenditure.
Fuel cost for running this care is revenue expenditure and it will be used up in a few days and does
not add to the value of the fixed asset.
Capital receipts
Capital receipts consist of
additional payments made to the business either by the owner or shareholder of the
business; or
fromthe sale of fixed assets of the business.
Revenue receipts
Any receipt in the normal running or through the day to day transactions of the business is
categorized as Revenue receipt.
Sales receipts of the business are revenue receipts.
What can be classified as Revenue
receipts & revenue expenditure?
Revenue receipts Revenue expenditure
Subscription Entertainment expenses
Proceeds from fund-raising projects (not Sundry expenses to run the activities of club
capitalized)
Staff wages
Interest on bank deposits
Postage & Stationery expenses
Receipts from sale of food in club restaurant
Electricity and water expenses
Depreciation
Building funds
Entrance fees
Limitation of Trial Balance
Though Trial Balance is prepared to check the arithmetical accuracy of double entries, there are still
some mistakes which cannot be identified by Trial Balance. These are:
Errors of omission
These are errors where the transactions are totally omitted. They are neither recorded in the Journal
or Ledge and thus do not appear in the Trial Balance.
Errors of commission
This means that a wrong amount is entered from the very starting in the Journal or Ledger and thus
a Trial Balance based on this amount may not show any mistake at all.
Errors of principle
These errors occur when the classification of accounts is wrongly done. For example, revenue
expenditure may be considered as capital expenditure. Repairs of machinery $200 were debited to
Machinery account whereas it should have been debited to ‘Repairs of machinery account’.
Compensating errors
These errors are those which cancel themselves because the same error is committed on both
sides. For example, Purchases were debited by $100 more and at the same time Sales were also
credited by $100. This will neutralize the effect of both the entries.
Bank Reconciliation Statement
Bank reconciliation statement is a statement prepared mainly to
reconcile the difference between the ‘Bank Balance’ shown by the
Cashbook and Bank statement.
Usually, the trader maintains a Bank Column in the Cash book and does all the entries related tothe
bank. At the end of the month, when he receives a Bank statement from the bank he might find
some differences between bank balance shown by Bank Statement and his Cash book. These
differences might arise due to many reasons. In order to reconcile and tally the differences, he will
prepare a Bank Reconciliation Statement.
Cheque issued by the trader but the customer has not yet presented it to the bank for
encashment.
This will show a less bank balance in the trader’s Cash book as he has already issued the
cheque, but the bank will not reduce the amount until the cheque is presented to it.
Cheque received by the trader was deposited into the bank for collection but the bank did not
realize the funds and did not credit the Trader’s account.
Trader deposited a cheque into the bank but it was dishonored by the bank. The reason may
be the customer does not have sufficient cash in his bank account.
Bank pays interest to the trader on his deposit but the trader will not come to know this till he
receives the Bank statement and thus his cash book will show less balance as compared to
the bank statement.
The bank might receive direct payment of interest or dividends on behalf of the trader for any
investments made by the trader. The trader will not come to know the details till he gets a
bank statement and thus his Cash book will be understated.
The bank might charge transaction fees or Bank charges or interest on any overdraft which
the trader will only know when he receives the bank statement.
A customer or debtor might directly pay into the trader’s bank account and the trader might
not be aware of this.
A Bank may pay bills, insurance premiums or some payment based on the standing
instruction of the trader. The details of these transactions will only be available to the trader
once he receives the bank statement.
A bank reconciliation statement can be prepared by taking the balance either as per cash book or as
per pass book as a starting point.
If the statement is started with the balance as per bank column of the cash book, the answer arrived
at the end will be balanced as per pass book.
Alternatively, if the statement is started with the balance as per pass book, the answer arrived at in
the end will be the balance as per cash book.
A debit balance as per cash book shows the amount of the money in the bank, whereas, a credit
balance means that the business has taken an overdraft. In the same way, a credit balance as per
pass book shows a positive bank balance whereas debit balance as per pass book shows an
Overdraft.
Method 4: Bank reconciliation statement by
Debit balance as per Bank Statement
(Overdraft).
Features
Usually, only Personal Accounts are prepared.
Cash Book records both business and personal transactions.
Too much dependence on Source documents to ascertain final status of the business.
There is no standard procedure in maintaining records and vary from firm to firm.
Usually found in a sole trader or a partnership firm.
Advantages
It is easy and simple method of recording business transactions.
Less expensive as qualified staff is not required.
Suitable for small businesses where cash transactions occur and very few assets and
liabilities exists.
Flexible method as there are no set procedures and principles followed.
Disadvantages
No double entry, thus Trial Balance cannot be prepared to check the arithmetical accuracy of
books of accounts.
Information related to assets and liabilities cannot be reliable because respective accounts
have not been maintained.
True Profit and Loss cannot be ascertained.
Comparison of accounting performance with previous year or other firms not possible as any
standard principle or procedure is not followed.
If the closing capital is more than opening capital, it shows a profit for the business.
If the closing capital is less than opening capital, the business had a loss.
The difference between the assets and liabilities of the business is the OPENING CAPITAL of the
business.
Similarly, prepare a ‘Closing Statement of Affairs’ to get the CLOSING CAPITAL of the business.
Once the Closing Capital is calculated, the Opening Capital is deducted from it.
Net Formula
Profit = Closing Capital + Drawings – Additional Capital – Opening Capital
Some Adjustment
The profit achieved from this method is not the final net profit.
Adjustments which result in increase in expenses or losses must be deducted from the Profit figure
to get the accurate net profit. These are
Depreciation
Outstanding expenses
Interest on Capital
Interest on Loans
Provisions for Doubtful debts
Adjustments which result in increase in incomes and gains must be added to the Profit figure. These
are
Prepaid expenses
Interest on investments
At the end a final Statement of Affairs is prepared after these adjustments are done.
Note: When the Opening Capital is more than the Closing Capital, it shows a LOSS.
In this case, the adjustments which result in an increase in expense are added to the loss amount
and the adjustments which result in increase income are deducted.
Final Accounts are prepared i.e. Trading and Profit & Loss Account and Balance Sheet from
the information collected in Steps 1 to 4.
Finding Missing information using
Accounting Ratios
If Gross Profit is expressed as a percentage of the cost
price. In order words, Mark up is given.
Mark up = Gross Profit/Cost price
Example
Calculate the Gross profit if the Sales = $54,000, Mark up is 20%.
Goods costing $100 has been sold at $120.
If sales are $54000 then the Gross Profit = 20/120 * 54,000= $9000
Example
Cost of goods sold= $3000
Opening Stock= $400
Closing Stock = $600
$400+$600
Average Stock = = $500
2
Therefore, Stock turnover = $3000/$500 = 6 times per year or 2 months
Dr. Cr.
XXXXX XXXXX
7.
8.
Cash (beginning)
Cash (end)
Features
Similar to Cash Book
Cash receipts are on Debit side and Cash payments are on Credit side
All cash receipts and payments are recorded irrespective of their relation to current year.
There is an opening balance and a closing balance
Manufacturing Account
It is prepared to ascertain the cost of goods manufactured during an accounting period.
xxxx
xxxx
Carriage Inwards
All expenses incurred for bringing the raw materials to the factory e.g. custom duty, excise etc.
Factory overheads
All indirect expenses related to the operation of factory such as
indirect materials (not direct raw material used in manufacturing) e.g. lubricants for
machinery
indirect labour (not direct labour) e.g. supervisor wages
indirect expenses such as factory insurance, rent, depreciation of machinery
Dr. Cr.
XXXXX XXXXX
Note
Only revenue receipts and expense are posted in this account
Only incomes and expenses pertaining that particular year are recorded. Incomes and
expenses pertaining to previous year or future year are adjusted for.
Distinction between Receipts and
Payments Accounts and Income and
Expenditure Accounts
Receipts and Payments Accounts Income and Expenditure Account
Similar to a cash account showing total cash Similar to Profit and Loss account showing
receipts and total cash payments during a incomes and expenses arising during a particular
particular period. period.
Records all cash receipts and cash payments Only records income and expenses of revenue
whether capital or revenue in nature. nature
Records all receipts and payments irrespective of Records only receipts and expenses relating to
their relation to this year, previous year or next the current year.
year.
At the end of the year excess of receipts over Excess of income over expenditure represents
payments shows a positive cash balance net income whereas vice versa represents a net
whereas a negative balance signifies an loss.
overdraft
Receipt and Payment account records the actual subscription received. It may pertain to any year.
However, In order to post it to the Income and Expenditure Account adjustments have to be made to
the subscription as only subscription pertaining to that particular year is recorded in I/E account.
How to calculate e.g. for Year 2009
Total subscription received 1000
Amount Amount
Subscription received during current XXXX Total Cash received as subscription XXXX
year (from Income & Expenditure during the current year
Account)
(collected for subsequent year) (not yet collected for current year)
XXXX XXXX
Features
Usually, only Personal Accounts are prepared.
Cash Book records both business and personal transactions.
Too much dependence on Source documents to ascertain final status of the business.
There is no standard procedure in maintaining records and vary from firm to firm.
Usually found in a sole trader or a partnership firm.
Advantages
It is easy and simple method of recording business transactions.
Less expensive as qualified staff is not required.
Suitable for small businesses where cash transactions occur and very few assets and
liabilities exists.
Flexible method as there are no set procedures and principles followed.
Disadvantages
No double entry, thus Trial Balance cannot be prepared to check the arithmetical accuracy of
books of accounts.
Information related to assets and liabilities cannot be reliable because respective accounts
have not been maintained.
True Profit and Loss cannot be ascertained.
Comparison of accounting performance with previous year or other firms not possible as any
standard principle or procedure is not followed.
If the closing capital is more than opening capital, it shows a profit for the business.
If the closing capital is less than opening capital, the business had a loss.
The difference between the assets and liabilities of the business is the OPENING CAPITAL of the
business.
Similarly, prepare a ‘Closing Statement of Affairs’ to get the CLOSING CAPITAL of the business.
Once the Closing Capital is calculated, the Opening Capital is deducted from it.
Net Formula
Profit = Closing Capital + Drawings – Additional Capital – Opening Capital
Some Adjustment
The profit achieved from this method is not the final net profit.
Adjustments which result in increase in expenses or losses must be deducted from the Profit figure
to get the accurate net profit. These are
Depreciation
Outstanding expenses
Interest on Capital
Interest on Loans
Provisions for Doubtful debts
Adjustments which result in increase in incomes and gains must be added to the Profit figure. These
are
Prepaid expenses
Interest on investments
At the end a final Statement of Affairs is prepared after these adjustments are done.
Note: When the Opening Capital is more than the Closing Capital, it shows a LOSS.
In this case, the adjustments which result in an increase in expense are added to the loss amount
and the adjustments which result in increase income are deducted.
Final Accounts are prepared i.e. Trading and Profit & Loss Account and Balance Sheet from
the information collected in Steps 1 to 4.
Finding Missing information using
Accounting Ratios
If Gross Profit is expressed as a percentage of the cost
price. In order words, Mark up is given.
Mark up = Gross Profit/Cost price
Example
Calculate the Gross profit if the Sales = $54,000, Mark up is 20%.
Goods costing $100 has been sold at $120.
If sales are $54000 then the Gross Profit = 20/120 * 54,000= $9000
Example
Cost of goods sold= $3000
Opening Stock= $400
Closing Stock = $600
$400+$600
Average Stock = = $500
2
Therefore, Stock turnover = $3000/$500 = 6 times per year or 2 months
In trading, the trader buys goods hoping to sell for more money than has paid.
The cost price is the price at which he pays for the goods and the selling price at which he sells.
If the selling price is greater than the cost price, a PROFIT is made. If selling price is lesser than the cost
price then a LOSS is incurred.
Formula:
Margin
ILLUSTRATION 1
Question on Mark Up
A trader bought a piece of furniture for $2000 and sells it for
$2,500.
(a) What is his mark up?
Later, he reduced the selling price ($2,000) by 5%.
(b) What is the revised mark up did he make?
Answer:
Profit = Selling price-Cost price
=$2,500-$2,000
=$500
(a)Mark up = Selling price –Cost price x 100%
Cost Price
=$500/$2,000 x 100%
=25%
(b) The revised Marked Up:
=Reduced Selling price =$2,500×0.95=$2,375
New Profit = Reduced Selling price-Cost price
= $2,375-$2,000
= $375
Revised Marked Up = $375/$2,000 x 100%
= 18.75%
ILLUSTRATION 2
Answer:
Let SP = Selling price CP= Cost price
Margin =Profit/SP x 100%
20%=Profit/SP x 100%
Profit=0.2SP=SP-CP
CP=SP-Profit
=SP-0.2SP
=0.8SP
Mark up = Margin x SP/CP
Mark up = 20% x SP/0.8SP
=25%
ILLUSTRATION 3
Answer:
Let SP=Selling price CP= Cost price
SP= CP + 72%CP
30,000=CP+72%CP
CP=$30,000/1.72 =$17,441.86
Profit = SP-CP
=$30,000-17,441.86=$12,558.14
ILLUSTRATION 4
Answer:
Margin = Profit/ Selling price x 100%
30% =Profit/$5,000 x 100%
Profit =$5,000 x30/100
=$1,500
Well, it starts with deciding on how to price your products (which is a big deal!). How
you price your goods will depend on whether you buy your products in bulk, or if you
buy them from different vendors at differing prices. However, in most instances, once
you have a system in place to figure out the cost (a.k.a. cost of goods sold or your
purchase price), you can use cost to help derive your price.
This is where the concept of markup comes in. Depending on where you search, you
can get differing answers for what markup is, and what it has to do with something
called margin (or gross profit margin).
If you’re wondering how to untangle that web of M-words and learn what the difference
is between margin vs. markup, then you’ve come to the right place.
How would we express the markup formula in this case? Let’s write this out:
Expressed in this way, margin and markup are two different perspectives on the
relationship between price and cost. Just like you could say: Maryan is taller than
Thomas, or Thomas is shorter than Maryan.
As you get to know your business better and you start to look at reports on your sales,
margin can be helpful for examining how much actual profit you’re making on each sale.
This where the concept of fixed markup really comes in handy, because it can help you
to automatically adjust your prices based on changed in cost. You could have cost and
price as separate numbers that you input into your spreadsheet or inventory
management software, but it’s much easier in the long run to have them linked.
Defining your markup as a percentage above cost ensures that you continue to earn
revenue on sales as costs increase, but it also means that you don’t have to keep
automatically going back to adjust your pricing. Manually adjusting your prices based on
cost is plausible for a smaller business, but this quickly becomes untenable as your
inventory expands to include hundreds of items.
If the Zealot becomes more expensive to produce over time, the price will have to go
up, and gaining a markup of $18 on a $36 item is very different a markup of $18 on an
item priced at $55. A fixed markup percentage would ensure that the earnings are
always proportional to the price.
For each order of the Zealot, someone will have to be there to package and sell it.
That’s a labor cost that’s likely broken down into an hourly wage.
If you ship Zealot to customers in boxes or send them in trucks to stores around the city,
you’ll also have to factor the cost of freight charges. Sending express or two-week
shipping can make those costs vary wildly.
Since the Zealot is a product that Archon Optical had to develop over time (it didn’t just
materialize as a completed product), they need to account for all of the time and
expertise that went into making sure that the Zealot was as as cool, aesthetically
pleasing, and blocked as many of the sun’s harsh rays as possible. That product
development time can also factor into cost.
Markup in inFlow
If your markup percentages change often, you can use inFlow’s Product Pricing feature
to help you change prices for multiple products, with just a few clicks.