Relationship between Capital and Revenue: ‘There is a cause and effect relationship between capital and revenue. Revenue is the effect of which capital is the cause. The relationship between capital and revenue is that between a tree and its fruits. If we assume capital to be a tree, profit is the fruit of that tree. It is the tree which produces the fruits, and it is the fruit that can be consumed. If the tree is tendered with care, it will produce more fruits, Conversely, if the tree is destroyed, there will be no more fruits. Therefore, revenues come out of capital and capital is the source of revenue. Capital is invested by a person in the business so that it may produce revenue. Moreover, as a fruit may give birth to another new tree, different revenues may also produce further new capital. Distinction between Capital and Revenue: s eee ye Revenue Woe arises from the investment made by the owner. | Itarises from the operations of the business [Gis the net worth of the business. Itis not the net worth of business It does not show the earning capacity of the | It shows the earning capacity of the business. business. vauctabstle 7” Itis not related to a particular accounting period, [It is always related to a particular accounting __| period. [tis of non-recurring nature. Itis of recurring nature. Tt does not arise from giving up @ product or | It arises from giving up a product or service in a service in a business transaction business transaction en Tt increases the size of the business. Tt may increase or decrease the size of the business. Capital is not the basis for revenue maintenance. | Revenue is the basis for capital maintenance. Tt is @ difference between total assets and total | It is the difference between the total revenues liabilities, and total costs. It has no direct effect on revenue. Ithas direct effect on capital Necessity for distinction between Capital Expenditure and Revenue Expenditure: 1. The distinction affects the measurement of profit in a number of accounting periods. 2. The distinction also affects the valuation of assets in the Balance Sheet. : Capital expenditure results in the acquisition of fixed assets, whereas revenue expenditure represents the expenses incurred in the business. : : 4, Accrual basis of accounting requires a clear distinction between capital expenditure and s revenue expenditure. —eee 5. The accounting treatment of capital expenditure and revenue expenditure is 6. Capital expenditure appear in the Balance Sheet as an asset, whereas revenue appear in the Profit and Loss Account as expenses. bs _ Capital expenditure increases the revenue earning capacity of the business expenditure maintains that. a 8. Capital expenditure may add to the value of an existing asset, while the ‘can decrease the value of net assets. eeDistinetion between Capital Expenditure and Revenue Expenditure: pital Expenditure ~ Revenue Expenditure It is the outflow of money to acquire fixed assets of.a business or adding to their value tis always an external transaction, Itis debited to an asset account [tis a real account. It is incurred for more than one accounting | Period. It finds a place in the Balance Sheet. [tis of non-recurring nature. All capital expenditures eventually become revenue expenditures, It is the outflow of money to meet running expenses of a business. It may be intemal (eg, depreciation) or external transaction. It is debited to an expense account, Itis@ nominal account. ae Itis incurred for a particular accounting period. Tt finds a place in the Profit and Loss Account. Itis of recurring nature. Revenue expenditures do not generally become capital expenditures. | Capital expenditures are not matched against capital receipts. All revenue expenditures are matched against revenue receipts. It does not affect the profit for an accounting period directly. It directly affects the profit for an accounting period It does not affect the net worth ofa business. It directly affects the net worth of the business, It may be incurred before or after the | commencement of the business. Capital expenditures of small value are treated as revenue expenditures (e.g., cost of rubber stamp). It is always incurred afier the commencement of the business Revenue expenditures of small value are not treated as capital expenditures. A loss in a business operation is not treated as capital expenditure. A loss in a business operation may be treated as revenue expenditure. It may be incurred by creating a long-term liability. It may be incurred by creating a current liability. TRIAL BALANCE: It is a statement whit is prepared in order to check the arithmetical accuracy of all the ledger postings. It ensures that all transactions have been recorded with identical debit and vredit amounts and the balance of each account of the Trading, Profit and Loss Accounts and the the accounts at one place. Features of a Trial Balance: Litisa has been computed correctly. It also facilitates the preparation Balance Sheet by making available the balances of all t of balances of all ledger accounts and cash book. 2. Itis not a part of the double entry system of book-keeping, Its just a working paper. 3. It can be prepared any time during the accounting period, 4 4: It serves as the instrument for carrying out the job of checking and testing, 6. Some errors are not revealed by the Trial Balance, e.g, errors of 5. Arithmetical accuracy of posting of entries from journal to ier beErrors which are not Disclosed by the Trial Balance: 1. Errors of Omission: If a particular transaction is omitted altogether from the books of original entry, it will not disturb the agreement of a Trial Balance. Is a sum of Rs. 100 paid to Mr. X, is not recorded either in the eash book or in the account of Mr. X, the total of the Trial Balance will fall short by Rs. 100 but the obit and credit columns will show no difference. 2. Errors of Principle: These errors arise because of an incorrect application of the principles of accounting, ¢.¢, failure to differentiate between capital and revenue expenditure. The existence of this type of error is not disclosed by the Trial Balance, Examples are: 1) Wages paid for installation of machinery being debited to Wages Account. 1b) Repairs of the building debited to Building Account, etc. 3. Compensating Errors: These are a group of errors, the total effect of which is not reflected in the Trial Balance. These errors are of a neutralizing nature, ie., one error is compensated by another error oF by errors of an opposite nature. For example, an extra debit in Salary Account for Rs. 100 may be compensated by an extra credit of Rs. 100 in Sales Account. 4. Recording wrong amount in the Books of Original Entry: Ifa transaction is wrongly recorded in the books of original entry and is subsequently carried through the ledgers, it will not cause disagreement in the Trial Balance, For example, if stationery purchased for cash Rs. 175 is recorded in the cash book as Rs, 751 and posted to Stationery Account in the ledger as Rs. 751, the Trial Balance will still agree 5, Recording Both Aspects of a Transaction more than once in the Books of Account: The Trial Balance will agree if both aspects of a transaction are recorded twice in the books of original entry. For example, if a credit purchase of Rs. 4000 from Tata Chemicals Ltd. is entered in the purchase day book twice, the error will not cause a disagreement in the totals of the Trial Balance. 6, Errors in Recording a Transaction on the correct side of a Wrong Account: If a transaction is recorded on the correct side of a wrong account, it will not cause a disagreement in the Trial Balance. For example, if Rs. $00 cash paid to Ram, is wrongly debited to Raman Account, it will not affect the agreement of the Trial Balance. Errors Disclosed by a Trial Balance:The disagreement of a Trial Balance indicates the presence of one ‘or more of the following error in the books of account. 1. Omission to post an amount in the Ledger: The two sides of a Trial Balance will not agree, when a transaction has been correctly recorded in the books of original entry but has not been posted in the ledger. Ifa cash receipt of Rs. 500 from X has been properly recorded in the cash book, but has not been posted on the credit side of X Account, the credit side of the Trial Balance will fall short by Rs. 500. properly recorded in the Stationery Account but not in the account of X, the Trial Balance agree. Similarly, if X Account is correctly credited but Stationery Account has been twice, the Trial Balance will not agree. 3. Debits are wrongly posted as Credits and Vice Versa: A Trial B recorded on the wrong side of an account. If a ‘but has beenare wrongly totaled. From the following list of balance, Capital Account Rs. 100000 Debtors Account Rs. 20000 Fixed Assets Account Rs. 92000 Sales Account Rs. 110000 Retums Outward Account Rs. 1000 Bills Payable Account Rs. 8000 Bank Overdraft Account Rs. 11000 ‘Opening Stock Account Rs. 15000 Creditors Account Rs. 20000 Purchases Account Rs. 70000 ‘Returns Inward Account Rs. 2000 Wages and Salaries Account Rs. 30000 Bills Receivable Account Rs. 15000 Rent Account Rs. 6000 Prepare a Trial Balance as on 31.03.2015 a. Opening Stock Prepare a Trial Balance: tg lar aaa secommcant Land ' Commission 1 Interest Received ee Discount Allowed 1000 Discount Received $00 Bills Payable a Bills Receivable ee Insurance ey Patents, a em 41000 From the following balances of Mr. Rohit Sharma, prepare a Trial Balance as on 31" March, 2015. Rent Received Rs. 5000 Debtors Rs. 12000 Purchases Rs, 50000 Salaries Rs, 9000, Discount Rs. 3000 Drawings Rs, 1000 ‘Creditors Rs. 13000 Bank overdraft Rs. 1000 Loan to X Rs. 6000 Sales Return Rs. 1000 Buildings Rs, 10000 Furniture Rs. 4900 Coal, Gas and Water Rs. 6000 Factory wages Rs. 11000 Postage and stamps Rs, 4000 Advertisement Rs. 500 Capital Rs, 20000 Sales Rs. $0000 ‘Loan from Y Rs. 10000 Cash Rs. 500 i Rs, 5000 mee Rs, 100 ‘Trade Mark Rss, $000 . i books of M/s. Roy & Co, for the ‘The following information was ascertained from the Si” March 2915. Younre required se prigazen TMM March 2 aw - & 25,000 70,000Returns inward 1,900 \ Drawings 10,000 ‘ Investments 45,000 \ Bank Balance 10,000 Dividend Reed. Sales 4,80,000 Loan 1,00,000 Commission Reed. 400 Capital 1,61,500 Opening Stock 69,400 From the following balance, prepare a Trial Balance as on 31 December, 2014: Building 5,000 P&M 11,000 Capital 50,000 Drawings 5,000 Purchases 90,000 Bank (overdraft) 10,000 Sales 1,00,000 Retums (Dr.) 10,000 Returns (Cr.) 8,000 Opening Stock 25,000 Salary 1,500 Rent 300 Insurance 400 Outstanding salary 1,200 Debtors 15,200 Creditors 11,000 Bills Receivable 4,800 ‘Commission (Cr.) 600 Bills Payable 4,000 Interest Received 200 Investments 5,200 Carriage 3,000 Printing & Stationery 1,000 Advertisement 600 . Cash 6,500ray up a Trial Balance correctly stating reasons in brief: Heads of Account LF. “Debit Balance Capital The clerk of a businessman wrongly prepared the following Trial Balance, You are required to ‘at Commencement count Allowed ‘omission Received Fixed Assets 6 __| Sales [7 [Purchases [3] Return Outward 1000 | [9 | Return inward 2000 ie [10 | Carriage Inward PE 600. 11 _| Carriage Outward a 700 | 12 _| Wages & Salary es 25000 [13 | Bills Receivable w 7000 14_| Debtors 9000 15 _| Bills Payable bi 7000) 16 [Rent 3000 17__|Anterest Paid _2000 | 18 | Cash. x00! 19 _| Creditors 6900 20 __| Stock at the End 33800 a 177500 177500