Success Roar Classes

Accounting Terminologies – IV

Accounting Terminologies - Success Roar Classes

What is a Receipt and what are the types of receipt?

  1. As per dictionary meaning, receipt means receiving or getting something. The same meaning is used herein accounts i.e., receiving or getting money in business. For example, goods sold for 1,00,000. This is the receipt in the business
  2. A receipt can be of two types-
    • Revenue Receipt-
      1. These are the regular receipts of the organization. Generally, these are related to sales, investments, etc.
      2. These can arise from operating as well as non-operating activities.
      3. Examples of these receipts are the amount received on sale, debtors, income from investment, Rent received, etc.
      4. These receipts are shown in of Trading and Profit & Loss Account.
    • Capital receipt
      1. These receipts are not regular in nature. Generally, these involve a huge amount of money.
      2. These receipts have a direct impact on the assets and liabilities of the business hence these are shown in the Balance Sheet either as an increase in liabilities or as a reduction in the value of the assets.
      3. Examples like the sale of an asset, introduction of capital, Loan from a bank, etc.

What is an Expenditure and what are the types of an expenditure?

  1. In Simple words, expenditure means payment for something. In accounts, expenditure can be defined as disbursement or payment of money or any asset or creating new liability for getting any goods, services, or asset. For example, for purchasing goods worth 10,000, a new liability named creditor is to be created in the books of accounts.
  2. An expenditure can be bifurcated into three categories-
    1. Revenue expenditure –
      1. These are short-term in nature and done on a regular basis. Generally, the benefit of such expenditure is recovered within one year.
      2. Examples of these expenditures are payment of salary, rent, commission, etc.
      3. These types of expenditures do not help in increasing the earning capacity of the business but these help in the smooth functioning of the day-to-day working of the business.
      4. These types of expenditures are shown in the Trading and Profit and Loss Account.
    2. Capital expenditure
      1. These expenditures are long-term in nature. Generally, these involve a huge amount of money and benefit from these relates with more than one year.
      2. These types of expenditures help in increasing the earning capacity of the business. Even sometimes it results in the creation of a new asset.
      3. These expenditures have a direct impact on the assets and liabilities of the business hence these are shown in the Balance Sheet either as a decrease in liabilities or as an increase in the value of the assets.
      4. Examples like the purchase of an asset like land, building, repairs of a building which results in an increase in efficiency of asset, etc.
    3. Deferred Revenue expenditure
      1. These expenditures are basically revenue in nature but incurred in a huge amount. Hence the benefit from such expenditure can be recovered in more than one year. Hence these are called deferred revenue expenditures.
      2. The recovered amount for the year debited to the Profit and Loss Account whereas the uncovered amount of these expenditures is classified as an asset and shown in the Balance sheet.
      3. For example, on 1st April 2019, the business organization paid 5,00,00 as advertisement expenditure. The yearly advertisement expenses amount to 1,00,000. Hence, it’s clear that the firm has paid the amount for five years. The situation at the end of different accounting year will be-
AT the end of the yearExpenditure recovered for the year (to be shown in Profit and Loss Account)Balance of uncovered expenditure (To be shown in Balance Sheet)
2019-20201,00,0004,00,000
2020-20211,00,0003,00,000
2021-20221,00,0002,00,000
2022-20231,00,0001,00,000
2023-20241,00,0000

Difference Points –

BasisCapital ReceiptRevenue ReceiptCapital ExpenditureRevenue Expenditure
NatureNon recurringRecurringNon recurringRecurring
Time periodLong termShort termLong termShort term
Benefit recoveredMore than 1 yearIn one yearMore than 1 yearIn one year
Use  Increase in Earning Capacity of the business.Smooth functioning of Daily working
ImpactIncrease in Liability (Loan) or decrease in asset (sale of asset)Increase in income of the businessDecrease in Liability (Repayment of loan) or Increase in asset (Purchase of asset)Decrease in income or profit
ExampleLoan, sale of asset etc.Sales, Interest income, commission received etc.Repayment of loan, purchase of asset etc.Rent, salary, cost of goods sold etc.

What are Expenses and revenues and other related terms?

  • Revenues
    1. Any amount received or receipts which are recurring in nature is called, revenue. For example, sale of goods or providing services, rent received, etc.
    2. These are shown in the Trading and Profit and Loss Account.
  • Revenue from operating activities
    1. Proceed from sale of goods or services in the business are called revenues from operating activities. For example, sale of goods, providing services to clients etc.
    2. These are shown in Trading Account.
  • Turnover
    1. Turnover refers to the total amount of sales during the year. This is shown in Trading Account.
  • Expenses-
    1. Expenses mean the cost incurred on regular basis for earning revenues. In other words that part of the expenditure that will expire in the current year will be called expenses.
    2. Expenses are incurred for earning revenues. For example, payment of rent, commission, purchases, depreciation, etc.
    3. Expenses are shown in the Trading and Profit and Loss Account.
    4. Expenses can be operating expenses, financial, cash expenses, non-cash expenses, etc.
  • Income-
    1. Income refers to the excess of revenue over the expenses. For example, if goods with costing of 40,000 sold for 50,000. Here revenue is 50,000, cost of goods sold is 40,000 and income is 10,000 i.e. 50,000-40,000.

Means Income = Revenue – expenses

  • Profit-
    1. Profit means the excess of all revenues over total expenses. This is generally calculated for an accounting period.

Means Profit = Total Revenue – Total Expenses

  • This is calculated in the Profit and Loss Account.
    1. This shows the net result of the all-business activities carried out in an accounting year.
    2. This increases the capital of the owner.
    3. For example, the following are the details for an accounting year – the Sales 2,00,000, interest income 50000, Depreciation 10,000, cost of goods sold 1,50,000. Here

Profit = 2,50,0000 (Total Revenue) – 1,60,000 (Total expenses) = 90,000

  • Gain-
    1. Gain means the benefit from the transactions which are incidental to the business. For example, gain on sale of an asset, winning of a court case, increase in the value of the asset, etc.
    2. For example, a machinery having book value of 1,00,000 sold for 1,50,000. This 50,000 is called gain which is shown in the Profit and Loss Account.
  • Loss-
    1. Loss means any monetary loss due to some avoidable (like loss by theft, Loss by fire, etc.) or unavoidable (Loss by flood, etc.) reason OR when the total expenses of the firm increase the total revenues of an accounting period.
    2. Loss is shown in the Trading and Profit & Loss Account.
    3. A loss reduces the capital investment of the owner in the business.

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