Financial Statements 1 Test 45

In accounting, a Drawing Account is used to track the withdrawals made by the owner(s) of a business for personal use. Since it represents withdrawals made by the owner(s), it falls under the category of Personal Accounts. Personal Accounts are those accounts which are related to persons, such as individuals, firms, companies, etc. Therefore, Drawing Account is considered a Personal Account.

Financial statements are comprehensive reports that summarize the financial activities and financial position of a business. They include the balance sheet, income statement (profit and loss account), cash flow statement, and statement of changes in equity. 

Deferred revenue expenditure is gradually written off to the profit and loss account over the useful life of the asset acquired or over the periods during which the benefits from the expenditure are expected to be realized. This ensures that the expenses are matched with the revenues they help generate over time, in accordance with the matching principle of accounting.

Financial statements are prepared at the end of the year to assess the profitability and financial position of a business. These statements typically include the balance sheet, profit and loss statement (also known as the income statement), cash flow statement, and statement of changes in equity.

Expenditure on repairing machinery is classified as revenue expenditure because it is incurred for maintaining the existing earning capacity of the machinery and is typically incurred frequently in the normal course of business operations.

EBIT (Earnings Before Interest and Taxes) is also known as operating profit. Operating profit represents the profit generated by a business from its core operating activities before taking into account interest and taxes. It is calculated by subtracting operating expenses, such as cost of goods sold, selling and administrative expenses, from gross profit.

Government subsidy received for purchasing new machinery is classified as a capital receipt because it results in an increase in the company's capital. It is a one-time receipt aimed at enhancing the company's asset base and productivity in the long term.

In accounting, direct expenses, directly linked to production, are debited to the Trading Account, reflecting their role in determining the cost of goods sold. Conversely, indirect expenses, not directly attributable to production, are debited to the Profit and Loss Account, illustrating their impact on the overall operational costs and profitability of the business. This classification ensures accurate reporting of costs and expenses, aiding in the assessment of the business's financial performance.

Financial statements provide valuable information to stakeholders (such as investors, creditors, management, government agencies, etc.) that aids them in making informed decisions about the company, such as investment decisions, credit decisions, policy-making, etc.

The accounting treatment of deferred revenue expenditure is based on the matching principle, also known as the accrual basis of accounting. According to this principle, expenses should be recognized in the period in which they contribute to earning revenues, regardless of when the actual cash payment occurs. Deferred revenue expenditure refers to expenses incurred in one accounting period that provide benefits over multiple periods. These expenses are initially treated as assets and are then gradually expensed over the periods in which they provide benefits, ensuring that expenses are matched with the revenues they help generate.