Differences between Current Assets and Fixed Assets

Tangible assets refer to those assets which can be seen and touched such as land and building, machinery, furniture, goods, cash in hand, etc. Intangible assets are those assets which have no physical existence, but can be sold and purchased. Goodwill, patent right, copyright and trademarks are some of the examples.

Various assets are broadly classified into the following two categories:
(i) Fixed Assets: These assets are purchased for the purpose of operating the business and not for resale as these are required in the business permanently.
Main examples of these are land, building, plant and machinery, furniture, etc.
(ii) Current Assets: Current assets are kept for short term and are required for day-to-day business activities. Stock of raw material, semi-finished goods and finished goods, debtors, bills receivables, bank balance, etc., are some of the examples of current assets.

Following are the examples of indirect incomes:
(i) Non-operating but recurring incomes:
(a) Interest (Cr.) or interest received on investments
(b) Rent (Cr.) or rent received
(c) Discount (Cr.) or discount received
(d) Commission (Cr.) or commission received.
(e) Dividend
(f) Miscellaneous/sundry Receipts.
(ii) Non-operating but non-recurring incomes:
(a) Bad debts recovered
(b) Profit on sale of fixed assets.

All other indirect expenses or loss on account of nonoperating transactions are included in this category.
Following are some non-operating expenses:
(i) Charity expenses
(ii) Legal expenses
(iii) Loss on sale of assets
(iv) Loss by theft or fire, etc

Profit and Loss Account is needed to serve the following objectives:
(i) Finding net profit or net loss: The Profit and Loss Account shows the net results of the business (netprofit or net loss) for a given accounting year.
(ii) Finding details of indirect expenses: All the indirect expenses are shown in the profit and loss account. These expenses can be compared over the period and suitable steps may be undertaken for controlling these expenses.
(iii) Helps in preparing Balance Sheet: A BalanceSheet discloses capital at the end of the year. Net profit earned is added to capital to find the capital at the end of the year. If there is a net loss, then it shall be deducted from the capital.
(iv) Maintaining provisions and reserves: To meet future uncertainties and to strengthen financial position of the firm/company, certain provisions and reserves are to be maintained out of profits. The amount of provisions and reserves depends upon net profit earned.
(v) Calculation of important ratios: For the purpose of financial analysis several ratios are calculated with the help of information/data provided in the Profit and Loss Account. For example, net profit ratio, operating profit ratio, expenses ratio, return on capital employed, etc

A Profit and Loss Account starts with gross profit brought down from Trading Account. It is recorded on the credit side. If there is a gross loss, then it shall be brought down on the debit side of the profit and loss account. All the indirect expenses are shown on the debit side. These expenses include office and administrative expenses, selling and distribution expenses, financial expenses, depreciation and other miscellaneous expenses. Income other than sales are recorded on the credit side. If the credit side exceeds, the balancing figure is called net profit. If debit side exceeds the difference is called net loss. This net profit or net loss is transferred to capital account.

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses - Closing Stock
Direct expenses are carriage on purchases, freight, octroi, factory expenses, manufacturing expenses or any other direct expenses.
Cost of Goods Sold = Sales - Gross profit.

In financial accounting, following expenses are treated as direct expenses:
(i) Expenses on Purchase of Goods: All expenses incurred on purchase of goods are considered direct expenses and are a part of cost of goods purchased.
These are:
(a) Freight, carriage and cartage on purchase of goods.
(b) Customs duty and octroi, etc.
(c) Landing and clearing charges. These are expenses relating to clearing the goods purchased or imported.
(d) Dock dues/charges.
(ii) Manufacturing Expenses: These are also called productive expenses. Following expenses are treated as manufacturing expenses:
(a) Wages or labour or productive wages or factory wages.
(b) Coal, gas and water.
(c) Fuel and power.
(iii) Factory Expenses: Factory expenses are also related to production of goods. These may include:
(a) Factory rent, rates and taxes.
(b) Insurance premium of factory building, plant and machinery,
(c) Factory lighting or electricity.
(d) Consumable stores, like, engine oil, lubricants, cotton waste.
(e) Packing charges to pack the goods manufactured to make it saleable.

Final accounts are also known as financial statements. Financial statements are organised summaries of detailed information about operating results and financial position of the concern. These are prepared at the end of the accounting period, generally one year. Financial statements normally include the following:
(i) Trading and Profit and Loss Account, and
(ii) Balance Sheet.

Capital Receipts Vs Revenue Receipts: There is no specific test to draw a clear cut demarcation between a capital receipt and a revenue receipt, in order to determine whether a receipt is capital or revenue in nature. One has to look into its true nature and substance over the form in the hands of its recipient. For example, sale proceeds of a land in the hands of a dealer in real estate is revenue receipt whereas the same in the hands of a dealer in cars is a capital receipt. The examples of capital receipts include sale of fixed assets, capital contribution, loan receipts and the examples of revenue receipts include sale of stock-in-trade, revenue from services rendered in the normal course of business, revenue from permitting others to use the assets of the enterprise, such as interest, rent, royalty, etc.

Following are the examples of deferred revenue expenditure:
(i) Heavy advertising expenditure: A large amount spent on advertising to launch a new product or to explore a new market is treated as deferred revenue expenditure. The benefit from such expenditure continues for several years.
(ii) Alteration and improvement: If an alteration is made to an existing asset and the expenditure is not substantial then it may not be capitalised. It may be treated as deferred revenue expenditure. For example, amount spent to make a room big or to put up a partition wall.
(iii) Preliminary or formation expenses: Expenses incurred on the formation of the partnership firm or company are treated as deferred revenue expenses as these benefits are for more than one year, and does not relate to any asset.
(iv) Research and development expenditure: Usually expenses incurred on research and development are treated as deferred revenue expenditure.
(v) Expenses related to issue of shares and debentures: In case of companies, expenses incurred on issue of shares and debentures are treated as deferred revenue expenditures. For example, underwriting commission, discount on issue of debentures, brokerage, fees paid to registrar to the issue and manage the issue, etc.

The expenditure for which payment has been made or a liability has been incurred in the current year, but deferred from being charged against the income of the current year is called deferred revenue expenditure. Such deference is based on the pre-assumption that it will be of benefit over a subsequent period or periods. These are written off over the period of benefits. For example, a large amount is spent on advertising to launch a new product or to explore a new market.

(i) Capital Expenditure
(ii) Revenue Expenditure
(iii) Capital Expenditure

Revenue expenditure may be defined as an expenditure which benefits the company for a short period. The benefits are normally derived within a year. Such expenditure is necessary to maintain the assets and to generate the revenue income in ordinary course of business. It is recurring in nature, and necessary to generate revenue income in ordinary course of business. It does not add to the value of assets or profit earning capacity.