Give examples to show how wrong classification can affect the ascertainment of profit
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Capital Expenditure yields benefit over a period extending beyond the accounting period. The following types of expenditure are usually treated as capital expenditure.
1) Expenditure which results in acquiring or bringing into existence an asset or advantage of enduring benefit - an asset means anything which can be used for a long time, like a building. All money spent in acquiring an asset is a part of capital expenditure.
2) Expenditure in connection with the purchase, receipt or installation of a fixed asset - all expenses in addition to the purchase price incurred for making the asset ready for use are added to the cost of the asset and thus are capital expenditure. Expenses of this type are wages paid to workers for erecting machinery, the cost of the platform on which the machinery will be fixed, overhaul of second - hand machinery purchased, interest on the loan raised to purchase a fixed asset, etc. it is to be noted that expenses incurred after the assets have been put to use are not capital expenditure.
3) Expenditure for the extension of or improvement in fixed assets - If because of any expenditure the profit - earning capacity will be capacity increases, through lowering costs or increasing output, the expenditure will be a capital expenditure.
4) Expenditure incurred to acquire the right to carry on business - The expenses necessary for either establishing the business like preliminary expenses for floating a company or obtaining license are capital expenditure. Similarly, the cost of a patent, that is the right to produce certain goods in a certain manner, is capital expenditure - only the initial expenditure is capital; renewal fee is revenue expenditure.
5) Expenditure incurred to acquire a tangible asset - Even if the asset does not prove to be profitable, the expenditure on it is a capital expenditure.
6) Legal charges incurred - Legal expenses incurred in connection with acquiring or defending suits for protecting fixed assets, rights etc., are also capital expenditure.
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Revenue Expenditure is the amount spent on running a business. In short, an expenditure which is not capital can be considered as revenue expenditure. The benefit of revenue expenditure is exhausted in the accounting period in which it is incurred. Examples of such expenses are -
1) Expenses incurred in the day - to - day running of the business such as rent, salaries, wages, power, fuel etc.
2)Expenses incurred for upkeep of fixed assets.
3) Expenses incurred on purchase of stock of materials and goods to the extent that these are used up during the year; the remaining amount will be an asset
4) Depreciation or the expired cost of fixed assets.
Capital Expenditure yields benefit over a period extending beyond the accounting period. The following types of expenditure are usually treated as capital expenditure.
1) Expenditure which results in acquiring or bringing into existence an asset or advantage of enduring benefit - an asset means anything which can be used for a long time, like a building. All money spent in acquiring an asset is a part of capital expenditure.
2) Expenditure in connection with the purchase, receipt or installation of a fixed asset - all expenses in addition to the purchase price incurred for making the asset ready for use are added to the cost of the asset and thus are capital expenditure. Expenses of this type are wages paid to workers for erecting machinery, the cost of the platform on which the machinery will be fixed, overhaul of second - hand machinery purchased, interest on the loan raised to purchase a fixed asset, etc. it is to be noted that expenses incurred after the assets have been put to use are not capital expenditure.
3) Expenditure for the extension of or improvement in fixed assets - If because of any expenditure the profit - earning capacity will be capacity increases, through lowering costs or increasing output, the expenditure will be a capital expenditure.
4) Expenditure incurred to acquire the right to carry on business - The expenses necessary for either establishing the business like preliminary expenses for floating a company or obtaining license are capital expenditure. Similarly, the cost of a patent, that is the right to produce certain goods in a certain manner, is capital expenditure - only the initial expenditure is capital; renewal fee is revenue expenditure.
5) Expenditure incurred to acquire a tangible asset - Even if the asset does not prove to be profitable, the expenditure on it is a capital expenditure.
6) Legal charges incurred - Legal expenses incurred in connection with acquiring or defending suits for protecting fixed assets, rights etc., are also capital expenditure.
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Revenue Expenditure is the amount spent on running a business. In short, an expenditure which is not capital can be considered as revenue expenditure. The benefit of revenue expenditure is exhausted in the accounting period in which it is incurred. Examples of such expenses are -
1) Expenses incurred in the day - to - day running of the business such as rent, salaries, wages, power, fuel etc.
2)Expenses incurred for upkeep of fixed assets.
3) Expenses incurred on purchase of stock of materials and goods to the extent that these are used up during the year; the remaining amount will be an asset
4) Depreciation or the expired cost of fixed assets.
tushart54:
Thanks... Can you pease Give a real life example...!
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