The business world is an assortment of business types operating in an array of sectors which you are likely to encounter during a career in accounting. One thing you will notice though is the fundamental similarities between the types of transactions all businesses enter into and the methods they use to record their income and expenditure.
All businesses are involved with financial transactions and all have the responsibility of documenting these transactions in their accounting records. There are many reasons for maintaining transactional records for a business:
- A business needs to keep track of its income and expenditure.
- The owners need to be able to see how the business is performing.
- For a business which trades on credit terms (as opposed to cash transactions), it is vital to know who owes money to the business and who the business owes money to, and how much.
- H.M. Revenue and Customs need to know how much the business is earning and spending.
- For private limited and public limited companies, it is a legal requirement, and the company accounts must be logged with the Registrar of Companies each year.
Accounting is simply a system for maintaining an accurate and complete financial record of all the transactions of a business organisation.
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Capital and revenue
In terms of the first point above – recording income and expenditure, the initial step is to understand the distinction between capital and revenue. It is important that you learn to distinguish between capital and revenue items as revenue items have an immediate impact on the measure of the performance of an organisation, i.e. they immediately affect the level of profit (or loss) the organisation makes in the accounting period.
Revenue income and expenditure
Revenue income is derived from day-to-day activities: Revenue income is derived from day-to-day activities:
- Sales of goods and services (trading assets) or fees and commissions.
- Interest and dividends received by the organisation from its investments in other businesses or interest-bearing accounts.
This means that if a business is engaged in selling shoes, then the income it receives from selling those shoes is the normal trading or revenue income. If a business receives interest or dividends from investments it holds, this income is in addition to that received from trading.
Revenue expenditure is the costs that a business incurs in administering itself during the trading year. These costs, or day-to-day running expenses, have a direct effect on the profit made by the business.
Capital income and expenditure
Capital expenditure is expenditure which results in the acquisition of new non-current assets, or improvements to existing non-current assets, such that their earning capacity and therefore their contribution towards profit is increased. e.g. A business might acquire a new van for deliveries and will expect to use it for several years. The van will be a non-current asset, or long-term benefit to the business and will help the business to make a profit during the time it is in use.
Capital income is the proceeds from the disposal of non-trading assets (non-current assets). The profits (or losses) from the disposal of non-current assets are included in the Income Statement for the period in which the disposal takes place.
Want to find out more and develop your skills in recording income and expenditure? Take a look at our Accounting courses today.