Question by C.A.(Dr.) G.S.Grewal – Series 5
- Capital and Revenue Expenditure is differentiated following the Materiality Concept.
- An Expenditure is Revenue in nature when it benefits the _______________ period only.
- Revenue Expenditure is transferred to:
(a) Balance Sheet.
(b) Profit and Loss Account.
(c) Partly to Balance Sheet and Partly to Profit and Loss Account.
(d) Trading Account.
Answer – Series 5
Reason Expenses are recognised in the Profit and Loss Account applying the Matching Concept which requires that expenses be set out in the Profit and Loss Account incurred to earn the revenue. An expense is capitalised only if they are traced directly to definable stream of future benefits. Thus, expense is differentiated between revenue and capital due to Going Concern Concept.
Reason: Profit earned or loss incurred during an accounting period is ascertained by comparing the revenue incomes and revenue expenditure. They are transferred to Profit and Loss Account to ascertain it.
Question – Series 10
- Wages paid to Anil for installation of machinery should be debited to Wages Account.
- An example of deferred Revenue Expenditure is _______________.
- Capital Expenses and Receipts are transferred to
(a) Trading Account
(b) Profit and Loss Account
(c) Trial Balance
(d) Balance Sheet
Answer – Series 10
Reason Wages paid to Anil for installation of machinery. It is a principal that expenses incurred on acquiring and making the asset ready for use is a capital expenditure and is debited to that particular asset account. Therefore, Wages paid to Anil for installing the machinery will be debited to Machinery Account.
- Deferred Revenue Expenditure
Reason: Capital expenses are the expenses which result enduring benefit. Capital Receipts are receipts arising from introduction of Capital, Receipt of loans and proceeds from sale of assets etc. They result in increase in liability or decrease in assets. Thus, They are shown in the Balance Sheet.
Question – Series 13
- Bank overdraft is shown as a Current Asset.
- A trader bought goods of ₹ 50,000. He sold the goods for ₹ 80,000 incurring expenses of ₹ 12,000 (including carriage outwards of ₹ 1,000). His gross profit is ___________________.
- Opening Stock ₹ 1,00,000; Closing Stock ₹ 60,000; Purchases ₹ 50,000 and Gross Profit is 10% of sales. The gross profit is:
(a) ₹ 10,000
(b) ₹ 12,000
(c) ₹ 20,000
(d) ₹ 15,000
Answer – Series 13
Reason Bank overdraft means amount overdrawn from the bank and thus, payable to it. It is a current liability of the enterprise as it is payable within a period of twelve months.
- ₹ 19,000
Reason: Cost of goods sold is ₹ 90,000 (₹ 1,00,000 (Opening Stock) + ₹ 50,000 (Purchases) – ₹ 60,000 (Closing Stock), which is 90% of Sales (Gross Profit being 10% of Sales).
Therefore, Sales is ₹ 90,000 X 100/90 = ₹ 1,00,000
Gross Profit = Sales – Cost of Goods Sold i.e., Rs, 1,00,000 – ₹ 90,000 = ₹ 10,000.
Question – Series 18
- Carriage on goods sold is shown in Balance Sheet.
- Income tax paid for the owner is debited to _______________ .
- Commission received in Advance existing in the Trial Balance is shown on the:-
(a) Assets side of the Balance Sheet
(b) Liability side of the Balance Sheet
(c) Debit side of the Profit and Loss A/c
(d) Credit Side of the Profit and Loss A/c
Answer – Series 18
Reason: Carriage on Goods Sold is treated as indirect expenses are therefore shown in the Profit and Loss A/c. Carriage on Goods sold is an expense related to sales. It is thus, an indirect expense shown in the Profit and Loss Account.
- Capital A/c
Reason: As the commission received in advance is liability, till it becomes due, as soon as it will become due it will be treated as income. Commission received in advance is in the nature of amount received against which service is yet to be rendered. Once the service has been rendered, it will become an income. Till that time it is liability and is shown on the liabilities side of the Balance Sheet.
Question – Series 21
- Trading Account is prepared to determine the financial position of the business.
- Profit and Loss Account shows the ____________ or ____________ by the business during the accounting period..
- Balance Sheet gives information regarding:-
(a) financial position during a particular period.
(b) profit earning capacity for a particular period.
(c) financial position as on a particular date.
(d) operating efficiency of the firm
Answer – Series 21
Reason: Trading Account is the account that shows the net result of buying, direct expenses and selling of goods and /or services. The net result of the account is either gross profit or gross loss.
- profit earned, loss incurred
Reason: Balance Sheet is a statement that shows the financial position of the enterprise. Financial position is always true at a particular point of time because with every transaction and event the financial position changes.
Question – Series 32
- Loan of ₹ 1,10,000 was taken on 1st November, 2019 at 10%. The amount of interest on Loan to be debited to Profit and Loss Account is ₹ 11,000.
- If gross profit is ₹ 20,000, Commission paid is ₹ 2,000, Commission Received is ₹ 3,000. The amount of operating profit will be ₹ _________________.
- Returns Outward in Trial Balance are deducted from
Answer – Series 32
Reason: Since the word p.a. is not written so interest on loan debited to Profit and Loss Account will be ₹ 11,000.
Reason: Returns Outward means returning the goods purchased. Thus, it is Purchases Return. Purchases are shown at net amount in the Trading Account i.e., Purchases – Purchases Return.
Question – Series 43
- It is necessary to differentiate between Capital Expenditure and Revenue Expenditure because of guidelines of different financial institutions.
- Cost of Goods Purchased for resale is an example of _________________.
- A Preliminary expense is an example of:
(a) Revenue Expenditure
(b) Deferred Revenue Expenditure
(c) Capital Expenditure
(d) they are Capital in Nature
Answer – Series 43
Reason: The distinction of transaction into Capital and Revenue is made for the purpose of placing them in Profit and Loss Account and Balance Sheet. .
- Revenue Expenditure
Reason: Preliminary expenses are written off over a period of time and till that time the amount not written off is carried in the balance sheet under the head Miscellaneous Expenditure.
Question Series – 49
1 Capital and Revenue Expenditure is differentiated following Materiality Concept
- Cost of goods purchased for resale is an example of _____________.
- Capital Expenditure incurred by an enterprise is transferred to:
(a) Profit and Loss Account
(b) Partly to Balance Sheet and Partly to Profit and Loss Account
(c) Balance Sheet
(d) Trading Account
Answer Series – 49
Reason: Expenses are recognised in the Profit and Loss Account applying the Matching Concept which requires that expenses be set out in the Profit and Loss Account incurred to earn the revenue. An expense is capitalised only if they are traced directly to definable stream of future benefits.
- Revenue Expenditure
Reason: Capital expenditure is placed on the asset side of the balance sheet as they will generate benefit for more than one accounting period and will be transfer to Profit and Loss Account of the year on the basis of utilisation of the benefit in particular accounting year.
Question Series – 50
- Insurance premium paid in advance is Prepaid Expense.
- The nature of Deferred Revenue Expenditure is _________________.
- Overhauling expense of second hand machinery purchased are:
(a) Revenue Expenses
(b) Capital Expenses
(c) Deferred Revenue Expenses
(d) Prepaid Expenses
Answer Series – 50
Reason: Prepaid Expenses are revenue expenses but, relating to future period that have been paid in advance. They are categorised as prepaid expenses and not Deferred Revenue Expenditure or Capital Expenditure.
Reason: The expenses incurred on overhauling of machinery are Capital expenses because they have been incurred on a new asset purchased to make it fit for use. It has resulted in an enduring benefit.
Question Series – 51
1 Amount spent for replacement of worn out part of machine is Revenue Expense.
- Receipt on account of advices rendered by a chartered accountant firm is __________________.
- A Machinery with a Book Value of ₹ 2,50,000 was damaged in firm against which it received a claim of ₹ 2,00,000. Insurance claim so received is:
(a) Capital Expenditure
(b) Revenue Receipt
(c) Capital Receipt
(d) Revenue Expenditure
Answer Series – 51
Reason: The amount spent for replacing the worn out part of the machine is towards maintaining the existing machine. Thus, the expense is revenue expense.
- Revenue Receipt.
Reason: The amount received on account of insurance claim is a capital receipt because it has been received against damage of machinery in a fire. Machinery is a Capital Asset and thus Insurance Claim is also Capital Receipt.