Mehra ; Sons purchased a second hand light motor Vehicle at a cost of Rs 2 lacs. Additionally, various accessories costing Rs50000 were also purchased along with the Vehicles which are required to be replaced on a yearly basis. Mr. Mehra wants to write off the overall outflow in Income statement Discuss, whether he is correct or not? Discuss the need to differentiate between the capital and revenue items? How these items are to be treated in the financials of the company? Give reasons supporting the same
Answers
Mehra ; Sons purchased a second hand light motor Vehicle at a cost of Rs 2 lacs. Additionally, various accessories costing Rs50000 were also purchased along with the Vehicles which are required to be replaced on a yearly basis. Mr. Mehra wants to write off the overall outflow in Income statement Discuss, whether he is correct or not? Discuss the need to differentiate between the capital and revenue items? How these items are to be treated in the financials of the company is given below
Explanation:
When any company buy any long term asset so amount spent on that asset is called capital expenditure. The purpose is to enhance the working capacity of any existing capital asset, or to increase its lifespan to generate future cash flows or to decrease the cost of production.
As a huge amount is spent on it, the expenditure is capitalised, i.e. the amount of expenditure is spread over the remaining useful life of the asset.
In a nutshell, the expenditure which is done for initiate current, as well as the future economic benefit, is capital expenditure. It is a long-term investment done by the entity, in the name of assets, to create financial gain for the years to come. For example – Purchase of Machinery or installation of
Capital expenditures are for expenditure for fixed assets.
Explanation:
- These are expected to be assets which add value for a long period of time. Revenue expenditures are for expense that are related to revenue transactions or operating periods of a specific time.
- Capital expenditures will increase the value every year like plot lands. However, revenue expenditures are for maintenance. They will vary constantly and reduce the value.
- Hence, it is not correct for Mr. Mehra to write off the overall outflow in his income statement.
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