Mgt101 Financial Accounting Solution

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Question # 1

Mr. Omer started business on 1st January 2010 with Rs. 20,000 as capital. Below
mentioned are the transactions which took place in the month of January.

a) Opened bank account with Rs. 20,000.
b) Goods are purchased from Wasiq on credit for Rs. 10,000.
c) Sold goods on credit to Munir worth Rs. 1,500
d) Purchase goods on cash for Rs. 1,000.
e) Cash sales to Adnan worth Rs. 1,000.
f) Machinery purchased and made payment by cheque Rs. 6,700
g) Borrowed Rs. 3,000 from Munir.
h) Paid rent to Waris Rs. 100 for the building in which business is situated.
i) Paid salary to clerks Rs. 150.
j) Amir withdraw Rs. 500 for his personal use.

Fill this table after reading these instructions:
For easy application of the above mentioned rules take each transaction separately and
ask yourself the following question:-
a) Describe the nature of accounts affected in each transaction?(In this you have to
see Assets, Liabilities, expense, Income, Capital or equity)
b) Which of the item is to be debited or credited?
c) Give reasons of debit and credit.

.................

_____________________________________________________
Debit Bank 20,000 Assets
Credit Omer Capital Equity
______________________________________________________
Debit Purchases 10,000 Expenses
Credit Accounts Payables - Wasiq Liabilities
_______________________________________________________
Debit Accounts Recivables - Munir 1,500 Assets
Credit Sales Revenue Revenue
_______________________________________________________
Debit Purchases 1,000 Expenses
Credit Cash Assets
________________________________________________________
Debit Cash 1,000 Assets
Credit Sales Revenue Revenue
________________________________________________________
Debit Machinery 6,700 Assets
Credit Bank Assets
_________________________________________________________
Debit Cash 3,000 Assets
Credit Loan from Munir Liabilities
__________________________________________________________
Debit Rent expense 100 Expenses
Credit Cash Assets
___________________________________________________________
Debit Salaries 150 Expenses
Credit Cash Assets
___________________________________________________________
Debit Omer's Drawings 500 (Amir Or Omer ?) Equity
Credit Cash Assets
___________________________________________________________

...........................

Question # 2
State with reasons that whether the following items are capital or revenue:

a)Purchase of Land.
b)Installation of Plant and Machinery
c)Expenditure incurred during the erection of Machinery.
d)Commission paid to a worker.
e)Repair of truck met with an accident.
f)Repair charges of furniture.
g)Paid wages to factory workers.
h)Paid advertisement expense.

...........

Solution:

Revenue expenditure is that which a business incurs for the purposes of trade, or in maintaining
the earning capacity of non-current assets.

Capital expenditure, on the other hand, is for the purchase of non-current assets or an increase in the earning capacity of such assets.

a) Purchase of Land : Capital - non-current assets
b) Installation of Plant and Machinery : Capital - incurred to make the
machinery work.
c) Expenditure incurred during the erection of Machinery : Capital - incurred to make the
machinery work.
d) Commission paid to a worker : Revenue - incurred for the purpose
of trade
e) Repair of truck met with an accident : Revenue - incurred to restoration of
truck
f) Repair charges of furniture : Revenue - incurred to maintain the
use of furniture
g) Paid wages to factory workers : Revenue - incurred for the purpose
of trade
h) Paid advertisement expense : Revenue - incurred for the purpose
of trade.