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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.

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Replies to This Discussion

sir c ka answer kha hai ya b ka hai

MGT-101 GDB

Solution.

  1. (a)  Purchase of Machinery is Capital Expenditure = 10,000,000 Rs

Because life of machinery is more than one year and this will help to generate income in future.

1. (b) Rent of office Building is Revenue Expenditure = 120,000 Rs

Because it is cost of resource consumed in the process of revenue generation. And the benefit of this expenditure is obtained. 

2. Correct Accounting treatment.

Purchase of Machinery

Date

Particulars

Code #

Amount (Dr)

Rs

Amount (Cr)

Rs

Oct 2015

Machinery Account

02

10,000,000

 

Oct 2015

Bank Account

01

 

10,000,000

 

Rent of Office Building

Date

Particulars

Code #

Amount(Dr)

Rs

Amount(Cr)

Rs

Oct 2015

Rent Account

03

120,000

 

Oct 2015

Bank Account

01

 

120,000

 

3. Why such Distinction is Necessary.

Ans. Such distinction is necessary because financial statements are reports generated to provide information to relevant personnel through books of account. Financial statements shows us the financial position and profitability of  business .If this distinction not made the statement will not prepare correctly and may shows the business in loss as Mr. Aslam entered the Capital expenditure in profit and loss account.

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