Financial Statements with Adjustments 5
(20) GOODS PURCHASED BUT IN TRANSIT
Sometimes the goods are purchased but in transit, such goods should be considered as Goods-in-transit and added to creditors in the balance sheet also.
Treatment:
Goods-in-transit A/c Dr.
To Creditors A/c
Two fold effect:
(1) Shown as Goods-in-transit on the asset side, in the Balance sheet.
(2) Shown on liabilities side of the Balance Sheet by adding to the Creditors.
Financial Statements with Adjustments 5
Special Notes for preparing Final Accounts
(1) Contingent liabilities are not to be taken in final accounts but shown as a footnote below the balance sheet.
(2) Apprenticeship premium if any should be considered as an income and credited to profit and Loss account.
(3) Goods sold but not recorded, should be added to sales and to debtors.
(4) Goods purchased but not recorded should be added to purchases and to creditors.
(5) Income Tax and LIC premium should be considered as drawings.
Distinction between Capital and Revenue ITEMS
Items that have important implications for preparing Final Accounts:
The revenue items form part of the trading and profit and loss account.
the capital items help in the preparation of a balance sheet.
If the benefit of expenditure extends up to one accounting period, it is termed as Revenue expenditure.
If the benefit of expenditure extends to more than one accounting period, it is termed Capital expenditure.
Distinction between Capital Expenditure and Revenue Expenditure:
(a) Capital expenditure increases earning capacity of business whereas
Revenue expenditure is incurred to maintain the earning capacity.
(b) Capital expenditure is incurred to acquire fixed assets for operation of business whereas
Revenue expenditure is incurred on day-to-day conduct of business.
(c) Capital expenditure is non-recurring by nature whereas
Revenue expenditure is generally recurring expenditure.
(d) Capital expenditure benefits more than one accounting year whereas
Revenue expenditure normally benefits one accounting year.
(e) Capital expenditure (subject to depreciation) is recorded in balance sheet whereas
Revenue expenditure (subject to adjustment for outstanding and prepaid amount) is transferred to trading and profit and loss account.
Check Your Understanding
Identify Capital and Revenue Expenditure