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Topic to be tested:

  • Importance of  distinction between capital and revenue expenditure

Learning Objectives:

  • To understand the concepts of capital and revenue expenditure and their accounting treatment in financial statement

DISCUSSION SCENARIO:


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.

Views: 13771

Replies to This Discussion

No... this is not correct as per my understanding because Purchase of machinery Rs. 10,000,000 & Rent of the office building Rs. 120,000 we need to show what treatment would you suggest in financial statement of profit and loss & balance sheet....

but bro ye to niaye ga es me p and loss or blnc sheet or cash flow statement aey gi na 3no me adjustement btani h

Bhai wo journal entry nai poch rha wo poch rha ha k eski financial stat mai kia treatment ho ge. (in my point of view)

exactly ....me with u zohaib

GDB SOLUTION PLZ

je blns sheet me machinry ka aey ga or profit and los me rent aey ga

In profit and loss account rent will be written and deducted from gross profit and machinery will be written in blnc sheet in fixd asset

ab plx cash flow me koi adjustment btaey ga k kya aey gi 

Cash Flow ... ummm i guess it shouldn't be the part at this level.
but if u r really concerned,
rent will be adjusted in CASH FLOW FROM OPERATIONmachine will be adjusted in CASH FLOW FROM INVESTING ACTIVITIES

sorry but caflow ka iss gdb say koi talaq nahin hai...iss k b option mein yeh pocha gya hai k inn 2 expenditure k honay say profit and loss account and balance sheet mein kya farq parey ga 

yep u r right...

thanks

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