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Simple Business


However, in so me cases a wide range of e xpenses may be capitalised,
ranging fro m advertising fees to interest payments, with the aim of making
the profit appear to be larger than it actually was.
The purpose of this may be to increase the reported profit to ma ke the
business appear more attractive when offering the business for sale, dealing
with banks, and dealing with investors.
In broad princip le, capita lising e xpenses may accurately re flect the situation
when the expenses lead directly to the creation of an identifiable asset that
can be used to produce income, such as a building or a patentable product.
There is no clear-cut difference between capitalised payments and expenses ,
and a subjective decision must be made in each case.
A conservative approach may involve e xpensing all payments and avoiding
capitalising e xpenses.
This approach may avoid inc luding assets within the balance sheet that may
have a questionable value, and may not be able to be sold.
In turn, this approach may place the business in a more secure position to
withstand unexpected events.
However, in cases such as the construction of actual build ings, a
capitalisation of e xpenses may be more suitable.
2.1.7.2. Accounts vs. Physical Holdings
In a basic financial management system, accounts may be kept that
correspond to cash receipts and actual bank accounts.
However, in mo re co mple x systems, multip le accounts may be maintained
that do not correspond to individual cash balances or bank accounts.
With funds set aside for specific purposes, for e xa mp le, a fund may be
ma intained for maintenance e xpenses, while a separat e fund is maintained for
utility costs such as gas and electricity e xpenses.
These funds could be recorded as separate accounts, with cred it and debit
entries and even transfers from one account to the other.
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