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Financial Accounting Principles

Assignment/ Class Activity 01
Time Allowed: 30 Minutes
Some Tips for capital expenditures
1.Capital expenditure is that expenditure the benefits of which are not fully consumed in a year but
spread over several years.

2. It is the expenditure which results in the purchase or acquisition of asset or property.

3. It is the expenditure incurred in connection with the purchase of asset.

4. It is the expenditure incurred to bring an old asset into working condition.

5. It is the expenditure incurred for extending or improving an existing asset to increase its productivity
or to increase the earning capacity of business or to decrease working expenditure.

It can be said that the capital expenditure benefits not only in the current accounting year but also many
years in the future. The expenditure is generally non-recurring and the amount spent is normally large.
However, it should be noted that not every big expenditure is capital expenditure. Capital expenditures
are shown in balance sheet

Some Tips for Revenue Expenditure

1. Revenue expenditure is the expenditure which benefits in the current accounting year. It is not
carried forward to the next year or years.

2. It is the expenditure which is incurred in the normal course of business to run the business and to
maintain the fixed assets of business.

3. It is the expenditure which is incurred on purchase of goods meant for resale or to purchase materials
which will be used to convert them into final product.

Therefore, revenue expenditure is a recurring expenditure made to maintain the business. The amount
spent is generally small and the benefit is for a short period which is not more than a year. All revenue
expenditure are charged to trading and profit and loss account.

Self Test Problems :

Explain under each of the option either it is capital expenditure or revenue expenditure. One example is
provided below:

Q: An old machinery is purchased for Rs. 1,00,000 and Rs. 25,000 has been spent to bring it in working
condition.
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Answer-- Both the above expenses are capital expenditures as Rs. 1,00,000 has been spent to acquire
the asset and Rs. 25,000 has been spent to make the machinery productive. The machinery will now be
used for many years and its cost is Rs. 1,25,000.

Provide the best possible explanation under each of the following queries.
Q1: A building is purchased for Rs. 10,00,000 and Rs. 1,00,000 has been spent as expenses like
brokerage, stamp duty, registration charges and on other legal expenses

Answer:

Q2: Repairs to building?

Answer:

Q3: Amount spent for the replacement of defective and worn out parts of an old plant

Answer:

Q4: Heavy expenditure incurred on advertisements.

Answer:

Q5: A machinery costing Rs. 5,00,000 is imported on which freight and insurance of Rs. 7,000, custom
duty of Rs. 13,000, clearing charges of Rs. 5,000 and installation charges of Rs. 10,000 were incurred.

Answer:

Q6: New equipment for existing machinery were bought for Rs. 30,000 to increase the production by
25%

Answer:
Q7: All expenses incurred in the ordinary conduct of business, such as rent, salaries, wages,
manufacturing expenses, carriage, commission, legal charges, insurance and advertisement, free
samples, salaries, postage expenses etc.

Answer:

Q8: Expenses incurred by way of repairs, renewals and replacement for the purpose of maintaining the
existing fixed assets of the business in working order.
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Answer:

Q9: Depreciation of assets used in business, Freight and cartage paid on merchandise purchased.

Answer:

Q10: Legal expenses on loans and mortgage

Answer: