Financial Statements 1 Test 44

The profit and loss account, also known as the income statement, provides information about a company's profitability by detailing revenues, expenses, and net income (or loss) over a specific period.

Any expenditure incurred which gives the benefit to the business for a long duration is termed as capital expenditure. If any modification is done in the plant & machinery, it reduces the normal wear and tear expenses. So if any expense is incurred which reduces the operating cost is called a capital expenditure.

Capital receipts are non-recurring receipts that result in either an increase in the company's capital or a decrease in its liabilities. The sale of fixed assets, such as land, machinery, or buildings, results in a capital receipt because it leads to a decrease in the company's fixed assets.

Financial accounting prepares financial statements like the income statement and balance sheet, essential for ascertaining profit and loss and showing the financial position. Cost accounting deals with analyzing and controlling costs. Human resource accounting focuses on valuing human capital. Management accounting provides information for internal decision-making.

Income statement is also known as trading and profit and loss account. Trading account is used to calculate gross profit or loss and profit and loss account is used to calculate net profit or loss.

When goods are destroyed by fire, the appropriate account to credit is the "Loss of goods by fire account." This account reflects the financial impact of the loss incurred due to the destruction of inventory. Crediting this account ensures proper recording of the loss in the accounting books, accurately reflecting the company's financial position. This approach helps maintain transparency and allows for appropriate adjustments in the financial statements.

Revenue receipts are those receipts that are earned by a business from its regular operations and are recurring in nature. Interest received on investments is a revenue receipt because it represents income earned from the company's investment activities, which are part of its regular operations.

Expenditure on preliminary expenses for setting up a new business is a classic example of deferred revenue expenditure. These expenses are incurred before the commencement of business operations but provide benefits over multiple accounting periods by aiding in the establishment and functioning of the business.

Gross profit is calculated by subtracting the cost of goods sold (COGS) from net sales. It represents the profit earned from the sale of goods before deducting operating expenses.

Since nominal account is of incomes gains losses and expenses they are shown in trading and profit and loss account so real and personal accounts are shown in balance sheet as it includes assets and liabilities.