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What type of assets are capital assets and how do they differ from current assets?
Capital assets, also referred to as capital goodsand plant, property and equipment, are a kind of non-current asset. The main purpose of these assets is generating revenue for an entity by being used for one or more purposes. An example of a capital asset is a delivery truck used by a delivery firm; the truck helps to generate revenue for the firm as they use it to provide delivery services. A firm does not sell capital goods to generate revenue (as they would sales stock), and they may keep them many years.
Current assets are assets that are expected to be used or turned into cash by the end of the reporting period. This includes sales stock (which is expected to be sold, at least in part, by the end of the reporting period), and bank (which the entity is likely to spend cash from within the reporting period). Capital assets are not current assets, as they are not expected to be turned into cash or used up within the reporting period.
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What is current expenditure?
Capital Expenditure:These are expenditure incurred in acquiring non-current assets or in making extension to existing non-current assets. Capital expenditure increases the earning capacity of a business. Businesses benefit from such type of expenditure over a long period of time. For example, a delivery vehicle can be used for over 5 years to deliver goods to customers. Computers may easily be used for 3 or 4 years. A building may be used for over 20 years.For the above reasons, capital expenditure are entered as non-current assets in the balance sheet. The cost of non-current assets is charged against profit over the years the assets can used and benefits derived. Such process is called "provision for depreciation".
What type of account is unearned fees?
a paper in current assets in liability
Difference between working capital and capital employed?
Capital EmployedTotal resources are also known as total capital employed and sometimes as gross capital employed or total assets before depreciation. Thus total capital consists of all assets fixed and current. In other words, the total of the assets side of the balance sheet is considered as total assets employed.While calculating capital employed on the basis of assets, following points must be noted.* Any asset which is not in use should be excluded.* Intangible assets like goodwill, patents, trademarks etc should be excluded. If they have some potential sales value, they should be included.* Investments which are not concerned with business, should be excluded* Fictitious assets are to be excludedWorking CapitalWorking capital is defined as the excess of current assets over current liabilities. Current assets are those assets which will be converted into cash within the current accounting period or within the next year as a result of the ordinary operations of the business. They are cash or near cash resources. These include:* Cash and Bank balances* Receivables* Inventory· Raw materials, stores and spares· Work-in-progress· Finished goods* Prepaid expenses* Short-term advances* Temporary investmentThe value represented by these assets circulates among several items. Cash is used to buy raw materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced. These are held as inventories. When these are sold, accounts receivables are created. The collection of accounts receivables brings cash into the firm. The cycle starts again.Current liabilities are the debts of the firms that have to be paid during the current accounting period or within a year. These include:* Creditors for goods purchased* Outstanding expenses i.e., expenses due but not paid* Short-term borrowings* Advances received against sales* Taxes and dividends payable* Other liabilities maturing within a yearWorking capital is also known as circulating capital, fluctuating capital and revolving capital. The magnitude and composition keep on changing continuously in the course of business.Permanent and Temporary Working CapitalConsidering time as the basis of classification, there are two types of working capital viz, 'Permanent' and 'Temporary'. Permanent working capital represents the assets required on continuing basis over the entire year, whereas temporary working capital represents additional assets required at different items during the operation of the year. A firm will finance its seasonal and current fluctuations in business operations through short term debt financing. For example, in peak seasons more raw materials to be purchased, more manufacturing expenses to be incurred, more funds will be locked in debtors balances etc. In such times excess requirement of working capital would be financed from short-term financing sources.The permanent component current assets which are required throughout the year will generally be financed from long-term debt and equity. Tandon Committee has referred to this type of working capital as 'Core Current Assets'. Core Current Assets are those required by the firm to ensure the continuity of operations which represents the minimum levels of various items of current assets viz., stock of raw materials, stock of work-in-process, stock of finished goods, debtors balances, cash and bank etc. This minimum level of current assets will be financed by the long-term sources and any fluctuations over the minimum level of current assets will be financed by the short-term financing. Sometimes core current assets are also referred to as 'hard core working capital'.The management of working capital is concerned with maximizing the return to shareholders within the accepted risk constraints carried by the participants in the company. Just as excessive long-term debt puts a company at risk, so an inordinate quantity of short-term debt also increases the risk to a company by straining its solvency. The suppliers of permanent working capital look for long- term return on funds invested whereas the suppliers of temporary working capital will look for immediate return and the cost of such financing will also be costlier than the cost of permanent funds used for working capital.Gross Working CapitalGross Working Capital is equal to total current assets only. It is identified with current assets alone. It is the value of non-fixed assets of an enterprise and includes inventories (raw materials, work-in-progress, finished goods, spares and consumable stores), receivables, short-term investments, advances to suppliers, loans, tender deposits, sundry deposits with excise and customs, cash and back balances, prepaid expenses, incomes receivable, etc.Gross Working Capital indicated the quantum of working capital available to meet current liabilities.Thus, Gross Working Capital = Current AssetsNet Working CapitalNet Working Capital is the excess of current assets over current liabilities, i.e. current assets less current liabilities.This concept of working capital is widely accepted. This approach, however, does not reflect the exact position of working capital due to the following factors:* Valuation of inventories include write-offs* Debtors include the profit element* Debts outstanding for more than a year likewise debtors which are doubtful or not provided for are included as asset are also placed under the head 'current assets'* Non-moving and slow-moving items of inventories are also included in inventories, and* Write-offs and the profits do not involve cash outflowTo assess the real strength of working capital position, it is necessary to exclude the non-moving and obsolete items from inventories. Working Capital thus arrived at is termed as 'Tangible Working Capital.'
Where does capital expenditures fit in balance sheet?
Capital expenditure are those type of expenditure the benefits of which are taken in more then one years by the business entity. So according to this all fixed assets are capital expenditures and fixed assets are shown at asset side of balance sheet.
What type of account is a drawing account?
A Drawing account is a contra capital account and is used by a proprietor type business. It is for recording the owner's withdrawals of the company's assets.
Why are there no capital assets in governmental type funds?
There are no capital assets in governmental-type funds because those funds account only for inflows and outflows of financial resources. Governmental-type funds can be used and indeed are used to acquire capital assets. When that happens, however, the accounting within the funds is such that there is an expenditure of financial resources, rather than an exchange of a financial resource for a capital asset. Capital assets are reported in government-wide financial statements, but not in fund financial statements.
Why are there no capital assets in government type funds?
There are no capital assets in governmental-type funds because those funds account only for inflows and outflows of financial resources. Governmental-type funds can be used and indeed are used to acquire capital assets. When that happens, however, the accounting within the funds is such that there is an expenditure of financial resources, rather than an exchange of a financial resource for a capital asset. Capital assets are reported in government-wide financial statements, but not in fund financial statements.
What is current expenditure?
Capital Expenditure:These are expenditure incurred in acquiring non-current assets or in making extension to existing non-current assets. Capital expenditure increases the earning capacity of a business. Businesses benefit from such type of expenditure over a long period of time. For example, a delivery vehicle can be used for over 5 years to deliver goods to customers. Computers may easily be used for 3 or 4 years. A building may be used for over 20 years.For the above reasons, capital expenditure are entered as non-current assets in the balance sheet. The cost of non-current assets is charged against profit over the years the assets can used and benefits derived. Such process is called "provision for depreciation".
What type of account is unearned fees?
a paper in current assets in liability
What is working capital gap?
In order to reduce the dependence of businesses on banks for working capital, ceiling on bank credit to individual firms has been prescribed. Accordingly, businesses have to compute the current assets requirement on the basis of stipulations as to size. So, flabby inventory, speculative inventory cannot be carried on with bank finance. Normal current liabilities, other than bank finance, are also worked out considering industry and geographical features and factors. Working capital gap is the excess of current assets as per stipulations over normal current liabilities (other than bank assistance). Bank assistance for working capital shall be based on the working capital gap, instead of the current assets need of a business. This type of financing assistance by banks was introduced on the basis of recommendations of Tandon Committee
Difference between working capital and capital employed?
Capital EmployedTotal resources are also known as total capital employed and sometimes as gross capital employed or total assets before depreciation. Thus total capital consists of all assets fixed and current. In other words, the total of the assets side of the balance sheet is considered as total assets employed.While calculating capital employed on the basis of assets, following points must be noted.* Any asset which is not in use should be excluded.* Intangible assets like goodwill, patents, trademarks etc should be excluded. If they have some potential sales value, they should be included.* Investments which are not concerned with business, should be excluded* Fictitious assets are to be excludedWorking CapitalWorking capital is defined as the excess of current assets over current liabilities. Current assets are those assets which will be converted into cash within the current accounting period or within the next year as a result of the ordinary operations of the business. They are cash or near cash resources. These include:* Cash and Bank balances* Receivables* Inventory· Raw materials, stores and spares· Work-in-progress· Finished goods* Prepaid expenses* Short-term advances* Temporary investmentThe value represented by these assets circulates among several items. Cash is used to buy raw materials, to pay wages and to meet other manufacturing expenses. Finished goods are produced. These are held as inventories. When these are sold, accounts receivables are created. The collection of accounts receivables brings cash into the firm. The cycle starts again.Current liabilities are the debts of the firms that have to be paid during the current accounting period or within a year. These include:* Creditors for goods purchased* Outstanding expenses i.e., expenses due but not paid* Short-term borrowings* Advances received against sales* Taxes and dividends payable* Other liabilities maturing within a yearWorking capital is also known as circulating capital, fluctuating capital and revolving capital. The magnitude and composition keep on changing continuously in the course of business.Permanent and Temporary Working CapitalConsidering time as the basis of classification, there are two types of working capital viz, 'Permanent' and 'Temporary'. Permanent working capital represents the assets required on continuing basis over the entire year, whereas temporary working capital represents additional assets required at different items during the operation of the year. A firm will finance its seasonal and current fluctuations in business operations through short term debt financing. For example, in peak seasons more raw materials to be purchased, more manufacturing expenses to be incurred, more funds will be locked in debtors balances etc. In such times excess requirement of working capital would be financed from short-term financing sources.The permanent component current assets which are required throughout the year will generally be financed from long-term debt and equity. Tandon Committee has referred to this type of working capital as 'Core Current Assets'. Core Current Assets are those required by the firm to ensure the continuity of operations which represents the minimum levels of various items of current assets viz., stock of raw materials, stock of work-in-process, stock of finished goods, debtors balances, cash and bank etc. This minimum level of current assets will be financed by the long-term sources and any fluctuations over the minimum level of current assets will be financed by the short-term financing. Sometimes core current assets are also referred to as 'hard core working capital'.The management of working capital is concerned with maximizing the return to shareholders within the accepted risk constraints carried by the participants in the company. Just as excessive long-term debt puts a company at risk, so an inordinate quantity of short-term debt also increases the risk to a company by straining its solvency. The suppliers of permanent working capital look for long- term return on funds invested whereas the suppliers of temporary working capital will look for immediate return and the cost of such financing will also be costlier than the cost of permanent funds used for working capital.Gross Working CapitalGross Working Capital is equal to total current assets only. It is identified with current assets alone. It is the value of non-fixed assets of an enterprise and includes inventories (raw materials, work-in-progress, finished goods, spares and consumable stores), receivables, short-term investments, advances to suppliers, loans, tender deposits, sundry deposits with excise and customs, cash and back balances, prepaid expenses, incomes receivable, etc.Gross Working Capital indicated the quantum of working capital available to meet current liabilities.Thus, Gross Working Capital = Current AssetsNet Working CapitalNet Working Capital is the excess of current assets over current liabilities, i.e. current assets less current liabilities.This concept of working capital is widely accepted. This approach, however, does not reflect the exact position of working capital due to the following factors:* Valuation of inventories include write-offs* Debtors include the profit element* Debts outstanding for more than a year likewise debtors which are doubtful or not provided for are included as asset are also placed under the head 'current assets'* Non-moving and slow-moving items of inventories are also included in inventories, and* Write-offs and the profits do not involve cash outflowTo assess the real strength of working capital position, it is necessary to exclude the non-moving and obsolete items from inventories. Working Capital thus arrived at is termed as 'Tangible Working Capital.'
Where does capital expenditures fit in balance sheet?
Capital expenditure are those type of expenditure the benefits of which are taken in more then one years by the business entity. So according to this all fixed assets are capital expenditures and fixed assets are shown at asset side of balance sheet.
What type of expenditures is included in the cost base of a non- current assets?
cap[ital expenditure
What type of account is a drawing account?
A Drawing account is a contra capital account and is used by a proprietor type business. It is for recording the owner's withdrawals of the company's assets.
Indicate how accounting equation is affected if machinery is purchased on cash?
A journal of that type of transactions would be: Debit Machinery Fixed Assets Credit Cash So it would decrease Current Assets and increase Long-Term Assets
How to Understand Working Capital?
No matter what type of industry you are working in, it is crucial that you have a solid comprehension of working capital in order to understand the basics of how the day to day operations of a business are financed. To put it simply, working capital is a business current total assets after all that a business’s real and possible liabilities have been considered. Working capital plays an incredibly important role in how lenders manage the risks of lending lines of credit to businesses and corporations, and there are numerous federal and international regulations that require businesses to furnish accurate information pertaining to their actual working when they are applying for credit or communicate with investors. Here is what you need to know in order to understand working capital.Working capital, or WC, is the measurement of the operating financial liquidity that a business has access to. Working capital is used along with metrics of capital investments like real estate and other properties to determine the current total real worth of a business. So long as a company has more assets than liabilities, it is referred to as having positive working capital. In some industries, it is necessary to sometimes operate with more liabilities than liquid assets, and this is considered operating with negative working capital.When accountants and financial managers are determining the current amount of capital that they have at their disposal, they will need to take into account their present net working capital, as well as their net working capital for the foreseeable future. A business’s net working capital is determined by measuring all of its current working capital other than cash and subtracting any current debts like short term loans that are incurring interest. In many cases, a business will have positive gross working capital but a very negative net working capital due to the fact that the business has tons of high interest debt and assets that are difficult to liquidize.
Why fixed assets are more profitable than current?
in my point of view fixed assets are fix by nature and gives fix type of revenue and there is less chance of risk in it and on the other hand current assests are not fix likecash receipts,debtors .there is more risk factor in it.
