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A business buys a new piece of machinery for £14,500.

Capital Expenditure (Asset)

SoFP

The machine is adjusted to make it run quietly. This costs £1,500.

Revenue Expenditure (Expense)

IS

A car salesman buys a second hand car for £2,100.

Revenue Expenditure (Purchase)

IS

A sole trader buys the car for use in his business, paying £3,000 for it.

Capital Expenditure (Asset)

SoFP

Of the £3,000 paid for the car, there was £210 for vehicle tax.

Revenue Expenditure (Expense)

IS

A company redecorates offices. £500 is spent on paint, and £3,500 is spent on new furniture.

Capital Expenditure (Asset)

SoFP

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Capital - SoFP Long term asset over 12 months

Revenue- IS short term less than 12 months

Revenue - IS short term to be sold

Capital - SoFP long term

Revenue - IS short term vehicle tax

Capital - SoFP long term redecoration and furniture

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A business buys a new piece of machinery for £14, 500

Capital expenditure

SOFP

The machine is adjusted to make it run quietly, costing £1,500.

Capital expenditure

SOFP

A car salesman buys a second-hand car for £2,100.

Revenue expenditure

IS

A sole trader buys the car for use in his business, paying £3,000 for it.

Capital expenditure

SOFP

Of the £3,000 paid, there was a £210 vehicle tax.

Revenue expenditure

IS

A company redecorates offices, £500 is spent on paint and £3,500 is spent on new furniture.

Capital expenditure

SOFP

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Business buys a new piece of machinery for £14,500 (Capital Expenditure) Balance sheet

The machine is adjusted to make it run quietly. This cost is £1,500 (Its a maintenance cost so its a Revenue expenditure). Income statement

A car salesman buys a second hand car for £2,100 (Capital Expenditure) Income statemen

A sole trader buys the car for use in his business, paying £3,000 for it (Revenue expenditure) Balance sheet

Of the £3,000 paid for the car, there was £210 for vehicle tax (Revenue expenditure) Income statement

A company redecorates offices, £500 is spent on paint, and £3,500 is spent on new furniture (Revenue and Capital Expenditure because the paint is maintenance of the office and new furniture is the tangible asset). Balance sheet

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1. Capital & SoFP

2. Revenue & IS

3. Revenue & IS

4. Capital & SoFP

5. Revenue & IS

6. Both

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1. Capital expenditure. Purchase creates a long-term asset that will provide benefits over several periods, so cost is capitalised.

Statement of Financial Position- as Property, Plant & Equipment (then depreciate part to IS over time).

2. Revenue expenditure- It is a maintenance cost to keep the machine operating.

Income statement as a repair/maintenance expense.

3. Revenue expenditure for the car salesman: the car is inventory (stock) held for resale, not a long-term asset.

SoFP as Current Asset – Inventory (becomes IS as Cost of Sales when sold).

4. Capital expenditure. The car will be used in the business over multiple periods so it is a non-current asset and capitalised.

SoFP as a non-current asset

5. Revenue expenditure. Tax is a period cost, not part of the purchase cost of the asset.

IS as an expense

6. Paint £500 = Revenue expenditure. Maintenance/repair of premises — expensed. Furniture £3,500 = Capital expenditure. New furniture is a long-lived asset, capitalised.

Paint: IS (maintenance expense). Furniture: SoFP as fixtures & fittings (then depreciate portion to IS over time).

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Question 3: The accounting equation for the Income Statement

(i)                  Write down the Accounting Equation:

Profit = Income - Expenses

(ii)                For each of the following terms, give a definition and a simple example:

·       PROFIT

Money left after expenses deducted from revenue

Revenue (10) – Cost (5) = £5 profit

·       (LOSS)

When expenses are higher than revenue

Revenue (5) – Costs (10) = £5 loss

·       INCOME (REVENUE)

Money generated from sales

20 books sold at £5 each = £100 revenue

·       EXPENSES

Cost of doing business

20 books purchased at £2 = £40 cost

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·       PROFIT- Definition: The financial gain when a business’s income is greater than its expenses.

Example: A shop makes £5,000 in sales and spends £3,000 on rent and wages → profit = £2,000.

·       (LOSS)- Definition: The financial shortfall when a business’s expenses are greater than its income.

Example: A café earns £1,200 from customers but pays £1,500 in costs → loss = £300.

·       INCOME (REVENUE)- Definition: The money a business earns from its normal operations, usually from selling goods or services.

Example: A cinema earns £10,000 from ticket sales in a week.

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(i)                  Write down the Accounting Equation:

Income Statement:

Profit (Loss) = Income – Expense

(ii)                For each of the following terms, give a definition and a simple example:

·       PROFIT -  Positive value – what was made from the sale after taking away the cost of sale e.g sandwich is sold for £3.00, ingredients cost £1.50. Therefore Profit is £1.50.

·       (LOSS) - Negative value – what was made from the sale after taking away the cost of sale e.g. sandwich is sold for £1.00, ingredients cost £1.50. Therefore loss is £0.50.

·       INCOME (REVENUE) – quantity x cost of sale. Total earning from sales. E.g sold 100 Cakes at £3, revenue is £300

·       EXPENSES – Day to day running costs of a business, e.g petrol

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·       EXPENSES- Definition: The costs a business incurs to earn income, such as wages, rent, utilities, or supplies.

Example: A taxi firm pays £500 for fuel and £800 in driver wages.

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1. profit is generated from the sales income - expenses

2. loss is when expenses exceed profit

3. income is generated from sales of goods or sercives profit - expenses

4. expenses are costs inccured from the day to day running of the bussiness income - profit

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Profit or Loss: Income - Expenses

Income: Profit + Expenses

Expenses: Income - Profit ( or + loss )

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Profit- Is the financial gain that the business makes after subtracting all expenses from their income (income - expenses = profit)

Loss- When a business's expenses are greater than their income

Income (revenue)- Money made from sales

Expenses- Running costs of the business

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Sales  = 120

Less cost of sales

70

Opening inventory  = 0

Add purchases

100

Less closing inventory

30

Cost of sales

70

Gross profit

50

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What was the cost of sales?

12,000

What was the gross profit?

£8,000

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What was the cost of sales?

2,500+11,300−1,800 =12,000

What was the gross profit?

20,000−12,000 =8,000

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13,500- 1,800 = 11,700 cost of sales

20,000 - 11,700 = 8300 gross profit

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What was the cost of sales? £12,000

What was the gross profit? £8,000

= 2,500 + 11,300 − 1,800 = £12,000.

Gross Profit = Sales − Cost of Sales = 20,000 − 12,000 = £8,000.

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What was the cost of sales?

£2,500

£11,300

£-1,800

£12,000

What was the gross profit?

Sales        – £20,000

Less COS - £12,000

£8,000

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Cost of Sales = 12,000

Gross profit = 8,000

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2,500 + 11,300 =13,800

13,800-1,800 =12,000 cost of sales

20,000-12,000 =8,000 gross profit

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What were the total expenses?

£5,000

What was the net profit for the year?

£8,000 - £5,000 = £3,000

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Total Expenses - £5000

Net Profit - £3000

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What were the total expenses?

1,200+300+500+3,000+12,000 = £17,000

What was the net profit for the year?

£20,000 - £17,000 = £3,000

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What were the total expenses? £5,000

What was the net profit for the year? £3,000

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Total expenses = 5,000

Net profit = 3,000