Income Statement and

Balance Sheet
 Revenue Expenditures
These are such expenditure , whose benefit is not likely to be
available for more than a year .
They are recorded in the Income Statement .Eg.

1. Expenses incurred for day-to-day running of a business e.g. rent , salary ,

wages , electricity etc.
2. Expenses for the repair and maintenance (upkeep) of fixed assets
3. Depreciation
4. Carriage
5. Insurance
6. Taxes etc.
 Capital Expenditures
These are the expenditures whose benefit does not get exhausted in
the year in which it is incurred , but available over a number of years
They are recorded in the Balance Sheet .E.g.

1. acquiring assets such as land , building , plant & machinery , vehicles etc
2. expenses in connection with the purchases , receipt and installation of the
fixed asset :making assets ready for use; wages paid for installing M/E ;
platform constructed for fixing M/E ; overhauling of a second-hand M/E.
3. expenditure to acquire the right to carry on business : obtaining license ,
patent , preliminary expenses etc
4. extension or improvement in fixed asset : profit earning capacity is
increased or results in lower cost .
5. legal charges incurred : defending suits for protecting fixed assets , rights
etc
 Expenses Which Appear to be Revenue in Nature But
Are Actually Capital Expenses

To be recoded in the Balance Sheet

1. Expenses incurred on the repair and white-washing for the first time on
the purchase of an old building , since these expenses are necessary to
make building usable.
2. Wages paid for the construction of building , installation of M/E etc
3. Fee to lawyers or registration expense in regards to purchase of assets.
4. Interest on loan raised to acquire an asset.
 Deferred Revenue Expenditure

Sometimes certain revenue expenditure may be usually heavy and its

benefit is likely to be available for more than one year.

To be recorded in the Income Statement and the Balance Sheet

In such a case , it is considered appropriate to spread the expenditure over

a number of accounting years. E.g. :

• heavy advertising ;
• huge loss (because of natural calamity);
• major alterations in the existing fixed assets (adding more exits to cinema
hall as per new norms).
 Revenue Receipts
They are the amounts recd in the normal and regular course of business
mainly by sale of goods and services.
To be recorded in the Income Statement
E.g.
• Sales Revenue
• Commission Recd
• Discount Recd
• Interest Recd

Capital Receipts are the amounts recd in the form of :

To be recorded in the Balance Sheet
• additional capital introduced
• premium on issue of shares
• loan received
• sales proceeds of fixed assets
Functional Classification:
Statement of Profit and Loss
for the year ended--------
Amount in Rs.
Net Sales xxx
(-) Cost of Goods Sold xxx
Gross Profit xxx
(-) Operating Expenses:
Operating Profit xxx
(+) Non Operating Income /Gain xxx
(-) Non Operating Expenses /Losses xxx

Profit Before Interest and Tax/Earning Before Interest and

Tax xxx
(-) Interest Expense xxx

Profit Before Tax/Earning Before Tax xxx

(-) Tax Expense xxx
Profit After Tax/Earning After Tax xxx
 Cost of Goods Sold
Merchandise Inventory (Opening Bal) ***
(+) Purchase Cost ***
(+) Freight Inwards ***
(+) Handling Cost ***
(+) Import Duty ***
(+) GST ***
(-) Purchase Return (***)
(-) Discount (***)
_____________
Cost of Goods Available for Sales ***
(-) Merchandise Inventory (Closing Bal) (***)
_______________
COGS ***
Illustration:

The books of Vijay Electronics show the cost of merchandise

inventory on Jan 1, 2016 was Rs 47,300. Assume purchases
of Rs 3, 26,900 , purchase return and allowances of Rs
13,200 and purchase discount of Rs 1,400. Freight paid on
purchases is Rs 28,100. And on Dec 31, 2016 the
merchandise inventory was Rs 89,000. Calculate the COGS.
 Rs.
Merchandise Inventory (Opening Bal)
47,300
(+) Purchase
3,26,900

(-) Purchase Return (13,200)

(-) Purchase Discount (1,400)

Net Purchase 3,12,300

(+) Freight 28,100

Net Cost of Purchases 3,40,400

Cost of Goods Available for Sales 3,87,700

(-) Merchandise Inventory (Closing Bal) (89,000)

Cost of Goods Sold 2,98,700

 Operating Expenses are the expenses incurred in running a
business such as:

• Selling Expenses are the expenses connected with selling

and distribution, storage charges, salaries of sales staff,
commissions, cost of delivering the goods, promotion, travel
of sales staff, advertising etc.

• Administrative Expenses are associated with general

services such as office rent, salaries, utilities, depreciation,
repair and maintenance, research and development,
insurance, legal charges , auditor fee etc.
Natural Classification:
Statement of Profit and Loss
for the year ended--------
Amount in Rs.
Revenue from Sales xxx
Net Sales xxx
(-) Expenses:
Purchases of Goods xxx
Change in Inventory xxx
Employee Benefit Expense xxx
Finance Cost xxx
Depreciation Expense xxx
Other Expenses xxx

Profit Before Tax/Earning Before Tax xxx

(-) Tax Expense (xxx)

Profit After Tax/Earning After Tax xxx

 T , PL, BS-2019.xlsx
Copy of Income Statement n Bal Sheet-2019.xlsx
 Adjustment Entries

1 Closing Stock

Closing Inventory A/c --------- Dr

To Trading A/c

Income Statement
Expenses:
Change in Inventory ***

Balance Sheet

Current Assets:
Closing Inventory ***
2 Outstanding Expense

Expense A/c -------------------------Dr

To Outstanding Expense A/c

Salaries A/c -------------------------Dr

To Outstanding Salaries A/c

Income Statement
Salary ***
(+) Outstanding Salary ***
Total Salary ***

Balance Sheet

Current Liabilities:
Outstanding Salary ***
3 Prepaid Expense

Prepaid Expense A/c -----------------------Dr

To Expense A/c

Prepaid Rent -----------------------Dr

To Rent A/c

Income Statement
Rent ***
(-) Prepaid Rent (***)
***
Balance Sheet

Current Asset:
Prepaid Rent ***
4 Accrued / Outstanding Income

Accrued Income A/c ------------Dr

To Income A/c

Accrued Interest ----------------Dr

To Interest Received A/c

Income Statement
Interest Received ***
(+) Accrued Interest ***
***
Balance Sheet

Current Asset:
Accrued Interest ***
5 Income Received in Advance

Income A/c ----------------------Dr

To Income Received in Advance

Rent Received A/c-------------------Dr

To Rent Recd. in Advance

Income Statement
Rent Received ***
(-) Rent Received in Advance (***)
***
Balance Sheet

Current Liability:
Rent Received in Advance ***
6 Depreciation

Depreciation A/c -----------------------Dr

To Accumulated Depreciation Asset A/c

Income Statement
Expense:
Depreciation ***

Balance Sheet

Asset ***
(-) Accumulated Depreciation (***)
7 Bad Debts

Bad Debts A/c --------------------Dr

To Provision for Bad and Doubtful Debts

Income Statement
Expense:
Bad Debts ***

Balance Sheet

Debtors ***
(-) Provision for B/D Debts (***)