2).

TRANSACTION ASSETS = LIABILITIES + CAPITAL

DATE
May 1 Meera invested Rs.70,000 cash in 70000 = + 70000
the busines
70000 = + 70000
2 Paid Rs.9,000 for office rent for the month. (-9000) = (-) 9000

61000 = + 61000
3 Purchased Rs.6,000 of supplies on account. 6000 = 6000

67000 = 6000 + 61000

5 Paid Rs.2,000 to advertise in the news paper. (-2000) = (-) 2000

65000 = 6000 + 65000

9 Received Rs.40000 cash for services 40000 = + 40000
performed.

105000 = 6000 + 105000

12 Withdrew Rs.10,000 cash for personal use. (-10000) = (-) 10000
95000 = 6000 + 95000

15 Performed Rs.54,000 of services on account 54000 = + 54000

for X co
41000 = 6000 + 41000
17 Paid Rs.25,000 for employee salaries. (-25000) = (-) 25000

16000 = 6000 + 16000

20 Paid for the supplies purchased on account (-6000) = (-) 6000
on May 3.

10000 = 6000 + 10000

23 Received a cash payment of Rs.40,000 for 40000
services performed on account on May 15.
(-40000) = +

10000 = 6000 + 10000

26 Borrowed Rs.50,000 from the bank on a 50000 = 50000 +
note payable.

60000 = 50000 + 10000

29 Borrowed Rs.50,000 from the bank on a 42000 = 42000 +
note payable.

102000 = 92000 + 10000

30 Paid Rs.2,750 for office utilities (-2750) = (-) 2750
 TOTAL= 99250 = 92000 + 7250

3A).Classify the following items as capital or revenue expenditure:

1. An extension of railway tracks in the factory area;

2. Wages paid to machine operates;
3. Installation costs of new productive machine;
4. Matericals for extension to foremen”s offices in the factory;
5. Rent paid for the factory;
6. Payment for computer time to operates a new stores control system;
7. Wages paid to own employees for building the foremen”s offices

SOLUTION-:

1. Extension of railway tracks in the factory area should be treated as a capital

expenditure because it will yield benefit for more than one accounting period.

2. wages paid to machine operates should be treated as revenue expenditure as it will

yield benefit for the current period only.

3. it is treated as capital expenditure because it will benefit the business for more
than one accounting period..

4. it is treated as capital expenditure because it will benefit the business for more
than one accounting period..

5. it is treated as revenue expenditure as it will yield benefit only the current period

6. it is treated revenue expenditure because it has been incurred to carry on the

normal business.

7. it is treated as capital expenditure because it will benefit the business for more
than one accounting period..

3B).State with reason whether the following are capital expenditure or

revenue expenditure.

1. Expenses incurred in connection with obtaining a licence for starting the factory
were 10000.
2. 1000 paid for removal or stock to anew site.
3. Rings and pistons of an engine were changed at a cost of a 5000 to get full
efficency.
4. 2000 spent as lawyer fee to defend a suit claimimg that the firm factory site
belonged to the plaintriff the suit was not successful.
 5. 10000 were spent on advertising the introduction of a new product in the
market,the benefit of which will be effective during four years.
6. A facrory shed was constructed at a cost of 1000000.A aum of 5000 has been
incurred for the construction of the temporary lauts for storing building materials.

SOLUTION-:

1.10000 incurred in connection with obtaining a license for starting the factory is a
capital expenditure.it is incurred for acquiring aright to carry on business for a long
period.

2. It is treated as revenue expenditure because it is not engacing the value of the

assest and it is also required fr starting the business on the new site.

3. it is revenue expenditure because the change of rings and piston will restore the
efficiency of the engine only and it will not add anything to the capacity of the
engine.

4.2000 incurred for defending the tittle to the firm assets is a revenue expenditure.

5.10000 incurred on adver tising is to be treated as revenue expenditure.

6.it is capital expenditure,similarly cost of construction of small hurts for starting

building materials it also a capital expenditure.

 4).Distinction Between Capital Expenditure and Revenue Expenditure:  The following are
the points of distinction between candurpital expenditure and revenue expenditure :
1.Enduring benefit : Capital expenditure is meant for enduring benefit,  e., for more than one
accounting period. Revenue expenditure benefits one accounting period only.
2.Nature of asset : Capital expenditure relates to the acquisition of fixed asset and revenue
expenditure relates to the acquisition of stock-in-trade.
3.Effect on net profit : Capital expenditure is capitalised while revenue expenditure is transferred to
the Trading or Profit and Loss Account. Unexpired portion of the capital expenditure is shown as an
asset in the Balance Sheet. Revenue expenditure is expired cost.
4.Nature of liability discharged : Expenditure incurred by an assessee to free himself from a capital
liability, for instance, disadvantageous lease is a capital expenditure, while the amount spent in
discharging himself from a recurring liability is of revenue nature.
5.Periodicity of occurrence : Capital expenditure is usually of non-recurring nature while revenue
expenditure is usually of recurring nature.
6.Earning capacity : Capital expenditure helps to increase the earning capacity of the business or to
reduce the operating cost. Revenue expenditure is incurred to maintain the existing earning capacity of
the business.
1. Matching : Capital expenditure are not matched against capital receipts. Revenue expenditures
are matched against revenue receipts for income determination.
2. Commencement of business : Capital expenditures may be incurred even before the
commencement of business. Revenue expenditures are incurred only after the commencement of
business.