Why is distinction between capital and revenue important? Give examples to show how wrong classification can affect the acertainment.
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capital expenditure is the one which is expenditure which increases the earning capacity through increase in productivity eg
buying a machine both revenue and productivity increase
replacing a worn out part of a machine will be revenue exp as this does not lead to increase in production but buying an extension of a machine however small or insignificant which increases its productivity will be cap exp . all the above arguments hold true for cap revenue and revenue earnings too .
wrong classification eg - a computer stationery equipment is debited to machinery ac instead of purchases ac , this will lead to understatement of gross profit and simultaneously net profit and on the other hand balance of assets has been overstated .
buying a machine both revenue and productivity increase
replacing a worn out part of a machine will be revenue exp as this does not lead to increase in production but buying an extension of a machine however small or insignificant which increases its productivity will be cap exp . all the above arguments hold true for cap revenue and revenue earnings too .
wrong classification eg - a computer stationery equipment is debited to machinery ac instead of purchases ac , this will lead to understatement of gross profit and simultaneously net profit and on the other hand balance of assets has been overstated .
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