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Key Terms
· Balance sheet: a document describing the financial position of a company at a particular point in
time, by company the items owned by the organisation (assets) with the amounts that it owes
· Income statement: an account showing the income and expenditure of a firm over a period of time
· Revenue expenditure: spending on say-to-say items such as raw materials, inventories (stocks),
wages and power to run the production process
· Capital expenditure: spending on non-current (fixed) assets ­ those assets…read more

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Balance sheet - Elements
· Assets
­ Items that are owned by an organisation
­ Non-current assets.
· Resources that can be used repeatedly in the production process, although
they do wear out or lose value.
· I.e. Land, Buildings, machinery, vehicles etc.
· Tangible assets
­ Non current assets existing physically
· Intangible assets
­ Non-current assets that aren't physical
» i.e.…read more

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Balance sheet - Elements
· Liabilities
­ Owed by an organisation
­ Non-Current liabilities
· Debts due for repayment after more than one year.
· Long-term to medium loans
· Debentures
­ Fixed interests loans with a set repayment date
­ Current liabilities
· Debts scheduled for less than one year.
· Payables (creditors), bank overdrafts, corporate tax and shareholder's
· Payables or creditors are people or organisations that are owed money
­ Supplier
­ Traders
» Gas
» Electricity
» Telephone systems.…read more

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Balance sheet - Elements
· Capital
­ Most reserves arise because shareholders have voted at the
annual general meeting to allow the firm to keep some of
the profit, rather than distribute to shareholders.
­ Share capital
· Funds provided by shareholders throughout the purchase of shares
­ Reserves and retained earnings
· Those items tat arise from increases in the value of the company,
which are not distributed to shareholders as dividends, but are
retained by the business for future use.…read more

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Balance Sheet - Purposes
· Recognising the scale of a business
­ Adding non-current assets to working capital gives an overall view of
the capital employed by a business and thus its overall worth
· Calculating the net assets of a business
­ The balance sheet show the worth of the business
­ Total assets ­ total liabilities
· Shows the value of the business to its shareholders
· Gaining an understanding of the nature of the firm
· Identifying the company's liquidity position
­…read more

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Balance Sheet - equations…read more

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Capital Expenditure, revenue
expenditure and depreciation
· Classifying business expenditure
­ Business expenditure can be classified as either
revenue expenditure or capital expenditure
­ Capital expenditure exists when the spending is on
an item that will be used time and time again. For
accounting purposes, if the expenditure on an
asset continues to help the business in future
years, it is capital expenditure.…read more

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The significance of the distinction between
capital and revenue expenditure
· When constructing accounts, accountants follow certain agreed principles.
On of the basic rule of accounting is the matching or accruals concept. This
states that, when calculating a firm's profit, any income should be matched
to the expenditure involved in creation that income.
· For revenue expenditure the implications are reasonably clear. Any wages
paid to production-line workers and payments for raw materials are
deducted from the income earned from selling the final product.…read more

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The significance of the distinction between
capital and revenue expenditure
· For capital expenditure the situation is very different. Fixed assets are used
over a long period, so any capital expenditure needs to be spread over the
lifetime of the fixed asset in order to `match' the spending to the income
that it creates.
· For example, a machine that costs £50,000 and lasts for 5 years could be
deemed to cost £10,000 a year for the next 5 years.…read more


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