Section A: Theory of Financial Accounting
Question 3
Which business organizations have need to prepare departmental accounts?
(b) State two reasons for preparing departmental accounts.
(c) State how the following incomes and expenses are apportioned in departmental accounts.
(i) discount allowed;
(ii) discount received;
(iii) rent and rates;
(iv) staff related costs;
(v) depreciation;
(vi) canteen expenses;
(vii) electricity;
(viii) advertising;
(ix) bad debts.
Observation
Majority of the candidates attempted this question on public sector accounting and performed fairly. However, many of them could not differentiate between capital expenditure and recurrent expenditure. Below are some of the suggested responses with examples:
- Reasons for differentiating between capital expenditure and revenue expenditure.
Capital expenditure is differentiated from revenue expenditure in order to:
- enable proper classification of assets into fixed assets and current assets.
- ensure that the profit and loss account for any period is charged with the appropriate expenditure for the period.
- ensure that cost of fixed assets are spread over the period that the assets will be in use;
- show the accurate financial position at the end of each period.
- comply with accounting standards in reporting.
(b)
- Capital Expenditure
Capital Expenditure is the expenditure incurred in the acquisition and/or improvement of fixed assets whose benefits are enjoyed by the organization for more than one accounting period.
- Revenue Expenditure
Revenue Expenditure is the expenditure incurred in acquiring goods and services whose benefits are enjoyed by the organization in the same accounting period in which it is incurred
Classification of costs and expenses into capital expenditure and revenue expenditure:
Costs and Expenses |
Classification |
i. Interest on loan to purchases computers and printers |
Capital expenditure |
ii. Cost of stationery for printers |
Revenue expenditure |
iii. Cost of installing and testing computer |
Capital expenditure |
iv. Cost of ink for the printer |
Revenue expenditure |
v. Purchase price of computer |
Capital expenditure |
vi. Cost of transporting computer and printer to office premises |
Capital expenditure |
vii. Cost of repairs of computer |
Revenue expenditure |