Question

Why is distinction between capital and revenue important ? Give examples to show how wrong classification can be affect the ascertainment of profit.

Answer 1

• Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only.

• The major difference between the two is that the Capital expenditure is a one-time investment of money. On the contrary, revenue expenditure occurs frequently.

• Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income Statement (depreciation), but Revenue Expenditure is shown only in the Income Statement.

• Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is not capitalized.

• Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure is a short term expenditure.

• Capital Expenditure attempts to improve the earning capacity of the entity. On the contrary, revenue expenditure aims at maintaining the earning capacity of the company.

• Capital expenditure is not matched with the capital receipts. Unlike revenue expenditure, which is matched with the revenue receipts.
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