identify the reason involved in classifying the expenditure into capital and revenue .
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Answers
Explanation:
let's understand what is capital and revenue expenditure
capital expenditure is the non recurring payment...
ex.when you buy a plant for production...
revenue expenditure is the recurring expense..
these expenses provide support to capital expenditure for attaining the company's financial objectives....
ex.your plant electricity bill...
for the payment of capital expenditure you require lots of money...
so,when you buy some plant for production with a price of rs.100 and earned a revenue of rs20
and in that all production related expenses are rs.10.
so 20-10=10 rs( without out subtracting the land purchased value)..
so,by removing that 100 rs plant value from 10..
you will be in the loss of 90...
which means you are understating your financial statements which is affecting the decisions of financial statements users...
for this the concept of depreciation has been introduced where in you will find the approximate life of your plant and divide its value throughout its life..
say, your plant is having a life of 20 years
so one year depreciation = plant value/life of the asset
(here it is assumed that the asset is not having any scrap value)
depreciation for one year =100/20 =》rs.5
so total revenue =20- expenses (10) - depreciation (5)=》rs5 profit earned in the year...
you should be familiar with going Concern concept...
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