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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: 13781

Replies to This Discussion

Expenditures for the purchase or expansion of plant assets are called Capital Expenditures

and are the recorded in asset accounts.

Expenditures for ordinary repairs,maintenance,fuel and other items necessary to the ownership

and use for plant and equipment are called Revenue Expenditures

113 main itna samuj naho aya but entry aisy he hon ge

purchases

       bank

rent

    bank

SOLUTION :
a) Purchase machinery account will be Capital and rent expense will be Revenue.

b) Purchase machinery
Dr. Asset (balance sheet)
Cr. Bank

Rent
Dr. Rent (income statement)
Cr. Bank

c) Rent is for the year use its expense out in a year.
and assets for machinery is capital in nature its depreciate for the life time in the income statement according to the IAS-16.
bhi logo dkho tiq hai???

Dear Ahmed, your solution is correct.. mene bhi asa hi kia tha khud se.... par mera style different tha... apka bhi correct hai..... thanks for sharing your idea :-)

thnx bhi :)

ur 3rd ans is not according to que i think

mujy bilkul smj ni a rhi k rent revenue ho ga ja capital

i think rent capital to ho ni skta 

but revenu kysy ho skta q k hm rent paid kr rhy hy to jy expense hwa na not revenue

i'm so confuse so, plz tell which is right for rent

Purchase of machinery is capital expenditure & rent of building is revenue expenditure 

its correct 100%

b) 1) Machinery(Dr)  (balance sheet)

                            Bank(Cr)

   (2)Rent(Dr)   (income statement)

                          Bank(Cr)

its correct 

sorry A but yar but balance sheet me Dr and Cr kahan se aa gya h or dekho just adjustment btani h na blnce sheet me or rent profit and loss me aey ga k income me ku dekho financial statements e blnc sheet or profit and loss h income statement to ni

Dear Students Don’t wait for solution post your problems here and discuss ... after discussion a perfect solution will come in a result. So, Start it now, replies here give your comments according to your knowledge and understandings....

comment 100 word exactly ya iss say zaida bi likh saktay hain ...aur ans post kartay waqt question  ki discussion likhni hai ya nahin??

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