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Wednesday, 16 November 2011

Write a note on the following, 1. Sinking fund 2. Depreciation fund 3. Reserve fund 4. Intangible assets 5. Capital expenditure 6. Revenue expenditure

It is accounting term for cash set a side out of the profits for the particular purpose and invested so that the correct amount of money will be available at the time of need may be used for the payment of liability or replacing the old assets. This amount can not be used for paying the dividend to the shareholders.

Note :-
i. Provision for depreciation for the wasting assets should be made by debiting the revenue accounts.

ii. When provision is made to repay the loans, or for redemption of debentures the profit and loss account is debited.

iii. If any profit is made on selling the investments representing the sinking fund, it should be transferred to general reserve. In case of loss it may be debited to the profit and loss account.

Every year an equal amount is written off and revenue account is debited. On the other hand depreciation account fund is credited during the estimated life of the asset. The amount of depreciation fund is invested in guilt edged securities.

The word fund is related to reserve. When reserve is represented by reliable investments outside the business it is known as reserve fund.

The assets which can not be seen with eyes and can not be touched with hands are called intangible assets. Such assets have no physical existence.

Example :-
1. Good will.
2. Prepaid expenses etc.

The amount of capital which is spent in the business is called capital expenditure it has the following kinds :

1. Amount of capital spent during the formation of company.

2. Amount spent on improvement of fixed assets.

3. Capital spent on increasing the earning capacity.

4. Capital spent for reducing the cost of production.

5. Capital spent for purchasing the fixed assets.

The amount spent for the following purpose is called revenue expenditure.

1. expenditure made on maintaining the fixed assets is included in the revenue expenditure.

2. Expenditure made on the purchase of floating assets is also called revenue expenditure.

3. Expenses to carry on the business such as telephone and electricity charges are also include in the revenue expenditure.


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