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Questions and Answers
Which type of asset is intended to remain in business for a long time?
What is the main characteristic of intangible assets?
Which of the following best describes current liabilities?
Which term describes the money owed by a business to others?
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What does working capital refer to?
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Which of the following is considered a non-current liability?
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Which of these is a current asset?
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What is meant by fixed capital?
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What is the primary use of capital receipts in a business?
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How are revenue receipts generally treated in financial statements?
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Which of the following best defines capital receipts?
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What is the main purpose of capital expenditure?
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Which of the following is an example of revenue expenditure?
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Which of the following is NOT a characteristic of revenue receipts?
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How are capital expenditures treated in accounting?
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Accountants match revenue receipts with expenses to determine what metric?
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Which of the following types of revenue is considered a revenue receipt?
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Which statement best describes revenue expenditure?
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What is a key benefit of accurate accounting treatment of expenditures?
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What is a key difference between capital receipts and revenue receipts?
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Which of the following is NOT typically a use of revenue receipts?
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Which of the following is NOT a purpose of capital expenditure?
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Which of the following categories does 'insurance premiums' fall under?
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What type of expenditure is primarily intended for short-term operational activities?
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What is the primary distinction between capital expenditure and revenue expenditure?
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How is capital expenditure categorized in accounting?
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What happens to renovation costs if they increase the property's value?
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Why are revenue expenditures typically classified as nominal accounts?
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Which of the following is true regarding the accounting treatment of capital expenditure?
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Which of the following is an example of how revenue expenditure can become capital expenditure?
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What type of expenditure is primarily incurred for the normal conduct of business operations?
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How does revenue expenditure influence a business's financial metrics?
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Study Notes
Assets
- Assets are tangible or intangible resources used in the business that provide future economic benefits.
- Examples of assets include land, buildings, machinery, and stock.
Types of Assets
- There are two main types of assets: current and non-current.
Non-Current Assets
- These assets are held for long periods and are crucial to the smooth operation of the business
- Examples include land, buildings, machinery, and furniture.
Types of Non-Current Assets
- Tangible Assets have a physical existence, meaning they can be touched and seen.
- Examples include buildings, machinery, and furniture.
- Intangible Assets lack a physical presence and represent a company's value through rights or benefits.
- Examples include goodwill, trademarks, and computer software.
Current Assets
- Current assets are easily converted into cash within a short period.
- Examples include cash in hand, cash at bank, and stock in trade.
Liabilities
- Liabilities represent financial obligations or debts owed to individuals or institutions other than the owner.
- Examples include loans from a bank, bills payable, and creditors.
- Formula: Liabilities = Assets - Capital
Types of Liabilities
- Non-Current or Long-Term Liabilities are payable in more than one year and represent long-term obligations.
- Examples include long-term loans and long-term deposits.
- Current Liabilities are payable within one year and represent short-term obligations.
- Examples include creditors and bank overdrafts.
Capital
- Capital is the total amount invested by the owner in the business, representing the owner's stake.
- Formula: Capital = Total Assets - Liabilities
Types of Capital
- Fixed Capital is used to purchase long-term assets like buildings, plants, and specialized equipment.
- Working Capital is used for the day-to-day operations of the business and ensures smooth cash flow.
- Formula: Working Capital = Current Assets - Current Liabilities
Debtor
- A debtor is an individual or entity that owes money to the business. They represent a current asset for the business.
Creditor
- A creditor is an individual or entity to whom the business owes money. They represent a current liability for the business.
Expenses
- Expenses are the costs incurred by a business during operations, including the use of goods and services to generate revenue.
Capital Expenditure vs Revenue Expenditure
- Capital expenditure (CapEx) is for long-term investments in assets that benefit a business for multiple years.
- Examples of CapEx include purchasing new machinery, building a factory, or upgrading technology.
- CapEx is recorded as an asset on the balance sheet and is depreciated over its useful life.
- Revenue expenditure (RevEx) is incurred for short-term benefits and covers the day-to-day operations of a business.
- RevEx examples include salaries, rent, advertising, and raw materials.
- It is typically recorded as an expense in the income statement.
Capital Receipts vs Revenue Receipts
- Capital receipts involve funds received from long-term investments, asset sales, or debt financing.
- These receipts are considered non-recurring in nature.
- They are shown on the liabilities side of the balance sheet.
- Revenue receipts are obtained from the normal operations of a business, like sales, service fees, or rental income.
- They are recurring in nature.
- Revenue receipts are shown on the income statement.
Key Distinctions Between Capital and Revenue
- Expenditure: CapEx is done for long-term benefits, while RevEx is for short-term operational needs.
- Receipts: CapEx receipts are non-recurring and shown on the balance sheet, while RevEx receipts are recurring and shown on the income statement.
Accounting Treatment of Expenditure
- Capital expenditure is debited to asset accounts and reported on the balance sheet.
- Revenue expenditure is debited to expense accounts and reported on the income statement.
Reasons for Capital Expenditure
- Expand production capacity
- Improve efficiency
- Enhance productivity
- Stay competitive
- Drive growth
Reasons for Revenue Expenditure
- Operate effectively
- Maintain market share
- Support sales and revenue growth
- Cover daily operating expenses
Examples of Revenue Expenditure Becoming Capital Expenditure
- Renovating a rental property that increases its value or extends its useful life.
- Developing software that has a long-term useful life.
- Modifying vehicles in a way that increases value or extends lifespan.
- Creating intellectual property with long-term market value or selling potential.
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Description
Test your understanding of business assets and liabilities, including the different types of assets and their significance in operations. This quiz covers both non-current and current assets, along with tangible and intangible distinctions.
