Financial Statements - I

loss will be incorrect. For example, the revenues earned during an accounting period are Rs. , , and the expenses shown are Rs. , , , the profit shall work out as Rs.

, , . On scrutiny of the details, you find that a revenue item of Rs. , (an expenditure on repairs of machinery) has been treated as capital expenditure (added to the cost of machinery and debited to machinery account, not to repairs account), and hence, does not form part of the expenses for the period. It means the actual expenses for the period are Rs.

, , and not Rs. , , . So, the correct profit is Rs. , , , not Rs.

, , . In other words, the profit has been over stated. Similarly, if any capital expenditure is wrongly shown as revenue expenditure (for example, purchase of furniture shown as purchases), it will result in under statement of profits, and also an under statement of assets. Thus, the financial statements will not reflect the true and fair view of the affairs of the business.

Hence, it is necessary to identify the correct nature of each item and treat it accordingly in the book of accounts. It is also important from taxation point of view because capital profits are taxed differently from revenue profits.