b) Purpose of accounting and keeping of financial records
c) Capital revenue and income revenue
d) Capital expenditure and revenue expenditure
In business, understanding the nature and purpose of accounting is very important. Young people are the future of business and they should be supported through training and financial support to ensure that they become successive entrepreneurs. Acorn is the new scheme with programs that encourage young entrepreneurs to understand and set up in business. Tesco Company will be used as an example to explain the accounting terms and the purpose of accounting to facilitate understanding.
It is a requirement by the Companies Act 1985 that all companies should keep records of its financial statements from one period to another (Darr 2009). Tesco Company’s directors have always ensured that proper records are kept which will provide accurate information on the financial position of the company. Apart from just the legal requirement, record keeping ensures that all assets of the company are safeguarded to avoid any frauds and loss of such assets. A company without good records will never know any loss of assets due to lack of sufficient details of all assets. Tesco has made this to be a director’s responsibility to avoid any complications.
In any kind of business it is important to keep accounting records. The accounting records include the invoices, receipts, journal entries, financial statements and other important information (Putra 2009). The business needs to keep expenditure records so that it can know how much it has spent and then try to control such expenditures in future. For example, Tesco Company may need to know how much it has spent in each of its superstores which are going to determine the level of profits for the whole company. Such a large company should obtain records from all branches and hence know which branch is spending the highest and which one is spending the lowest amounts. As an entrepreneur, you should keep progress records to understand how your business is growing and make any corrections in the weak performing areas (Marriot 2011, p. 33).
In case of any controversies in the accounting policy, a company that has kept good records of its financial statements and audit reports can defend successfully in case it is reported to have been involved in an illegal operation. For example, Tesco company had been reported by another analyst that it reports low profits relatively to its competitors, by overestimating its expenses in order to avoid paying huge taxes (Ahmed 2010). The company managed to successfully defend itself by providing evidence of audited reports that it had obtained from Price Water Coopers which was its auditing company. Even entrepreneur who need to borrow capital, are required to provide their financial records before being granted any funds or loans.
Accounting provides a clear explanation of the costs and revenues of the business. In Tesco Company, the accounting is done as per the policies of accounting set by Tesco. These accounting policies are often different from one company to another. Tesco recognises the gains or losses from foreign exchange rates of the different countries that it operates in, as reserves (Elvis 2009). It also has a policy of using retail prices at the stores in the valuation of its stocks. It therefore explains why the various items in the balance sheet and income statements are valued at specific amounts. An entrepreneur should check the costs incurred and compare them with revenues so that they can be kept in control.
In the preparation of budgets, it is crucial to have some records of past performance or historical records which will form the basis of estimates. Any records of costs incurred will be useful for the estimation and setting of prices of goods and services. It is saves time for a company to prepare budgets by using a previous budget and adjusting it appropriately. Tesco Company uses past records of performance in terms of reported profits and revenue to plan for the future periods. If for example, the sale of certain brands decreases over time, then it tries to improve the quality of the brand or quit manufacturing such brands and replaces them with other more superior brands. This ensures that it keeps growing its profits from one period to another compared to its competitors. An entrepreneur should always keep watching the trends of revenue and expenditure from time to time to keep them in control (Weil 2008, p. 21-24).
Revenue refers to the income or amounts received by a business from a given transaction which may involve a sale of goods or services. It can be classified into two main categories: capital revenue and revenue income. Capital revenue is the amount received from the investment of funds in a business. It does not result from the daily operations of the business. Such revenue is also referred to as a capital gain by the entrepreneurs. Examples of such revenues include dividends to shareholders and capital interest based on the amount of capital invested in the business. A good example is that of Tesco Company which may buy a delivery van for $ 10,000 and sells it later for $10,500. There is a capital gain of $ 500, which is the difference between the selling price and the purchase price. However, there may be a capital loss if the selling price is less than the purchase price. In this example, it can be assumed that the vehicle was sold for $9,700 while the purchase price is still at $ 10,000. This means that there is a capital loss of $300. Revenue income on the other hand, is the income generated from the daily business operations of the organisation. For example, Tesco Company may obtain its revenue from selling food and other non-food services both locally and internationally. Whatever it charges as price to the consumers is the revenue income that it receives.
Expenditure is the amount incurred by the business in form of costs as it tries to increase its earnings. The expenditure can be classified as either a capital expenditure or revenue expenditure. A capital expenditure is the amounts incurred by the business in the buying of non- current assets or acquiring assets whose benefits shall be received for a long time usually more than a year (Linda 2011). At an organisation like Tesco, the capital expenditure may include the amounts incurred in the purchase of ovens, refrigerators, vehicles, purchase of buildings and premises or other non-current assets. This expenditure is usually too high compared to the revenue expenditures. The benefits to the business are received over long periods which extend over a year. For Tesco Company, the vehicles used for delivering food to various stores and customers can be classified as capital expenditure which cannot be used in the computation of profits. The only consideration is that of depreciation whereby there is an amortisation of the assets’ cost is over their useful life.
After understanding the purpose and nature of accounting, an entrepreneur should use these skills in order to plan for the business to be started. First, one should understand the nature of business to be undertaken, after which the revenue and expenditures can be determined in advance. This will guide the entrepreneur in estimating the amount of capital required as well as the expected returns from the business (Burne 2007 p. 60). These are the simple plans that every business begins with before eventually growing into a large business.
Ahmed, G 2010, Tesco accused of using aggressive accounting policies, viewed 17 October 2012,
Burne, P 2007, Entrepreneurship and small business, Palgrave Macmillan Limited, Houndmills, Baingstoke.
Darr, S 2009, The importance of keeping good accounting records, viewed 17 October 2012,
Elvis, D 2009, Tesco accounting policies, viewed 17 October 2012,
Linda, R 2011, The difference between capital expenditure & capitalized expenditure, viewed 17 October 2012,
Marriot, S 2011, The young entrepreneurs guide to starting and running a business, Harvard Business Review, NY: New York.
Weil, R 2008, Financial accounting, Thomson Learning, South Melbourne.