Who reads the accounts, and capital or revenue

After a year of journal entries, ledgers and a trial balance, the owner wants two answers: did I make a profit or a loss, and what do I have today? The financial statements (also called final accounts) answer both. In Class 11 you prepare them for a business run by one person, a sole proprietor.

Different people read them for different reasons. Internal users, the owners and managers, want to know how well the business did and where to improve. External users want other things: the government checks the tax, a bank lending money wants to know whether the business can repay the loan and the interest, and a prospective owner wants to know what the business is worth.

Before you can prepare them, every spending must be sorted into one of two kinds.

• Capital expenditure buys or improves a fixed asset and benefits more than one year: buying a machine, adding a floor to the building, and costs like registration fees or installation paid to get an asset ready. It goes to the balance sheet.
• Revenue expenditure keeps the business running and benefits only this year: wages, rent, repairs, electricity. It is usually recurring (it comes again and again). It goes to the trading and profit and loss account.

Receipts are sorted the same way. Selling goods brings a revenue receipt. Selling an old fixed asset, like old furniture, brings a capital receipt.

Some spending falls in between. Heavy advertising for a new product may help sales for several years; it is deferred revenue expenditure, written off over those years.

Getting this wrong changes the profit. If ₹20,000 of machinery repairs (revenue) is added to the machine (capital), expenses look ₹20,000 smaller and profit is overstated: ₹2,00,000 instead of the true ₹1,80,000.