Types of income and expenditure (C2&C3)

Question 1

define income

Answer 1

The money a business receives through a lump sum investment or from sales of its goods/services

Question 2

What are the two types of income

Answer 2

capital and revenue

Question 3

Describe capital income

Answer 3

-comes from investors or owners of the business
-usually used to buy fixed assets for the business that are within the business long term e.g. premises, equipment

Question 4

what are fixed/Non-current assets

Answer 4

Items of value owned by the business likely to stay in the business for more than a year.

Question 5

what are loans

Answer 5

-capital income
-money given to a business from a bank
-business repays loans plus interest
-may be secured by collateral (mortgage) or unsecured (credit card)
-monthly payments must be paid whether the business is making profits or not

Question 6

what are shares

Answer 6

-capital income
-business can issue shares to shareholders to raise capital income
-shareholders are owners of the business
-they recieve voting rights and rewards in the form of dividends (share of the profits)

Question 7

what is owners capital

Answer 7

when an owner funds the business through personal savings

Question 8

what are the 5 sources of capital income

Answer 8

shares, loans, owners capital, debentures

Question 9

what are debentures

Answer 9

-medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest
-re-paid as a lump sum on a pre agreed date
-can be secured against assets

Question 10

describe revenue income

Answer 10

-money flowing into the business by day to day operations
-by-product of business performance

Question 11

what is collateral

Answer 11

-valuable property owned by someone who wants to borrow money
-provided to a lender as a guarantee of repayment

Question 12

what are the 5 sources of revenue income

Answer 12

sales, rent received, commission received, discount received, interest received

Question 13

credit sales

Answer 13

-money made from sales of goods and services
-cash or credit

Question 14

rent received

Answer 14

-business owns property and charges others for use

Question 15

commission received

Answer 15

-a business/person that sells products/services on behalf of another business
-for each successful sale they get a % of commission

Question 16

discount received

Answer 16

-business pays suppliers a reduced price for goods (due to quick payment or bulk orders)
-Reduces cost to the business

Question 17

interest received

Answer 17

-money made from saving or lending
-Positive bank balance (saving) means a business will receive interest on this
-may lend money to another person/business so interest is charged to the lender and the business will receive interest as a form of revenue.

Question 18

expenditure

Answer 18

the money that a business spends

Question 19

capital expenditure

Answer 19

-funds used to acquire/upgrade physical assets (capital items) such as property, equipment & intangibles.

Question 20

non-current assets

Answer 20

-long-term investments
-capital items are non-current assets
-include tangibles e.g. land, property and equipment and appear on a business’ statement of financial position

Question 21

what are the 5 intangible types of capital expenditure

Answer 21

trademarks, patents, goodwill, brand name, intellectual property

Question 22

trademarks

Answer 22

-unique symbol, logo or brand name that sets businesses apart from one another
-key influence on customer choice and brand loyalty
-valuable to business over time (synonymous with the company name)

Question 23

patents

Answer 23

-legal protection of an invention
-gives inventor the right to stop others from making, using or selling their invention without their permission for a certain time period.

Question 24

goodwill

Answer 24

-sum of money added to a business’ value due to having an established customer base, reputation and good name =.
-increases selling price of the business

Question 25

intangibles

Answer 25

assets owned by a business that add value to the business but arent physical

Question 26

brand name

Answer 26

-brand recognition a valuable asset
-instills trust in customers and distinguishes a business from its competitors

Question 27

intellectual property

Answer 27

-something you create using your mind
-e.g. story, symbol or invention

Question 28

revenue expenditure

Answer 28

-money spent day-to-day on a regular basis by the business
-shown on the profit and loss account

Question 29

inventory

Answer 29

includes raw materials, finished goods or supplies needed to provide a service

Question 30

rent

Answer 30

-regular payment to landlord for use of property or land
-usually monthly payments

Question 31

rates

Answer 31

-payments made to local council for services (street lights, roads)
-based on the size and location of the premises

Question 32

heating and lighting

Answer 32

-payments for energy services such as gas and electricity
-business receives regular bills, often quarterly (every 3 months) to pay for services.

Question 33

water

Answer 33

-payment for supply and use of water
-can be a fixed rate or based upon usage if a water meter is fitted

Question 34

insurance

Answer 34

-business is legally required to take a number of these policies out to protect itself from serious losses
-e.g. building insurance, public liability insurance

Question 35

name as many types of revenue expenditure

Answer 35

inventory, rent, rates, heating and lighting, water, insurance, administration, telephone, postage, stationary, salaries, wages, marketing, bank charges, interest paid, straight-line depreciation, reducing balance depreciation, discount allowed.

Question 36

administration

Answer 36

-paperwork that goes on within a business
-administrative costs include: postage, printing, stationary, telephone charges

Question 37

Salaries

Answer 37

annual figure paid to an employee divided into equal monthly payments

Question 38

Wages

Answer 38

Hourly rate paid to an employee with a direct link between number of hours worked and money paid

Question 39

Marketing

Answer 39

Costs associated with attracting customers and convincing them to make a purchase e.g. advertisements, promotional events, point of sale materials

Question 40

Bank charges

Answer 40

-banks charge businesses for each transaction
-banks may offer free banking to businesses for the first year as a marketing technique

Question 41

Interest paid

Answer 41

-Businesses that have bank loans or mortgages will be charged interest on this
-banks may offer businesses preferential rates if they are confident the money will be paid back and want to keep that business a loyal customer

Question 42

Straight line depreciation

Answer 42

An asset is depreciated by a set amount each year

Question 43

reducing balance depreciation

Answer 43

An asset is depreciated by a set percentage of its remaining value each year

Question 44

Discount allowed

Answer 44

-Reductions offered to customers are an expense to the business as reduces cash flow into the business.
-Discounts can attract customers, for bulk purchases or to gain competitive advantage.

Question 45

Depreciation

Answer 45

An accounting technique used to spread the cost of an asset over its useful life.