Topic to be tested:
During the month of October 2015, a limited company paid following expenditures through its bank account:
1. Purchase of machinery Rs. 10,000,000
2. Rent of the office building Rs. 120,000
Mr. Aslam - a newly hired junior accountant of the company recorded the above expenditures in profit and loss account as he was unaware about the difference between capital and revenue expenditures. This adversely affected the company’s profitability due to overcharging of certain expenditures.
Answer the following:
a) Identify the nature of above expenditures as to capital or revenue?
b) Suggest a correct accounting treatment of the above expenditures in the financial statements
c) Why is such distinction necessary in preparation of financial statements?
Note: To avoid negative marking complete your comment within 100 words.
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The general rule for distinguishing between capital and revenue expenditure is as follows:
· The expense whose benefit lasts for a period longer than an accounting period is called capital
· The expense whose benefit is obtained within an accounting period is termed as a revenue
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b) Suggest a correct accounting treatment of the above expenditures in the financial statements:
Machinery a/c (Dr.)
Bank A/c (Cr.)
Is this treatment correct??