Questions from 1 to 10. Show your love for us by sharing our contents. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.Thus, the differences between these two types of expenditures are as follows: For example, KLM Company incurred heavy expenditures in order to increase the useful life of its production plant from 5 years to 7 years. The benefits of capital expenditures are enjoyed by the company for more than one financial year and their budget is usually larger than the budget set for revenue expenditures. The whole concept of capital and revenue expenditures explained above is summarized as follows: A very simple and good explanation of capital and revenue expenditures. This was not covered by insurance. The plant is a fixed asset that will be used for many years by the company. The differences between capital expenditures and revenue expenditures include whether the purchases will be used over the long-term or short-term. (e) Revenue Expenditure = The expenditure is related to purchase of goods for resale, which itself is a revenue expense, therefore, carriage is also a revenue expense. Capital and revenue expenditures are two different types of business expenditures that we often find in financial accounting and reporting. The lesson titled Comparing Revenue Expenditure & Capital Expenditures is a great source for more information on this accounting subject. The test of long and enduring benefit cannot be applied where the advantage consists of facilitating the assesseâs trading operations, leaving the fixed capital untouched. The Concept of Capital and Revenue Expenditure: Expenses, losses, and incomes are also known as revenue items since they together will show up the net profit or revenue earned. Distinguish between capital and revenue expenditure 2. Capital and revenue expenditures Quality Move Company made the following expenditures on one of its delivery trucks: Prepare journal entries for each expenditure. Revenue expenditures are usually less expensive than capital expenditures, small enough to be expensed against a shorter revenue period. 43 OF 1975, Supreme Court (cited +410 times). Definition of Capital Expenditure. 221,246 Crore in 2016-17, thus registering almost 10 times increase. Interactive Past Paper Multiple Choice Questions Practice: Set-1 2. An expense is a word very similar to expenditure but expense shows the deduction in the value of the asset while expenditure simply denotes the obtaining of asâ¦ Day-to-day expenses incurred by the company. Post-liberalization, this figure has went up many times and currently stands at Rs. Questions from 11 to 20. In accounting and finance these expenditures are also termed as CapEx. The director was alive then and it was not known whether any pension would be payable to him at all. The members of association entered into an agreement restricting the number of working hours per week to run their looms. It provides benefits in the future period. Failure to make distinction between capital and revenue items will result in A] under trading Any expenditure on the fixed asset after it has been used for a while is treated as Revenue Expenditure eg repairs to the computer; electricity costs. Explore the other resources for Capital and Revenue Expenditure. Horngren's Financial & Managerial Accounting, The Financial Chapters (6th Edition) Edit edition. Expenditure which is deductible for income-tax purposes is one which is towards a liability existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. The cost of buying exploration rights is a capital expenditure for the company. paying for materials, staff costs) which is known as "revenue expenditure".The distinction between capital and revenue expenditure is quite an important one. The cash spent on investment in a business is normally referred to as "capital expenditure".This can be contrasted with spending on day-to-day operations (e.g. They are expensed out when incurred and are not made part of the balance sheet but rather shown in income statement of the company. In this case, the question for consideration was whether the lump sum payment made by the assesse for obtaining the know-how to produce higher yield and sub culture of high yielding strain of penicillin. Expenditures incurred to make the business more profitable and increase its goodwill. is treated as capital expenditure. “In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. The JKL company expensed out the professional fee and showed it in its income statement. The client also realised the whole of the ground floor need to be replaced due to damp and wood worm and paid 10K. Incorrect treatment of expenditure . For example: revenue expenditures are shown in the profit and loss account as their benefits are for one accounting period i.e. In case the expenditure is not incurred on the said capital asset the same would become unsalable and obsolete. ... Case 3-81 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT Cam and Anna are very satisfied with their first month of... Cornerstones of Financial Accounting. carriage and freight paid on the purchase of fixed assets. Amount received from IDBI as a medium term loan for augmenting working capital. 3. To determine the nature of expenditure, consideration has to be given to â¦ 395 OF 1957, Supreme Court (cited +270). There should be no possibility of funds forming a part of the funds of the assessee. “But we are unable to agree that a loan obtained can be treated as an asset or advantage for the enduring benefit to the business of the assessee. 1191 OF 1974, Supreme Court (cited +230 time). A business expenditure is an outflow of economic resources (mostly in the form of cash and cash equivalents) as a result of undertaking various activities during the normal course of business and to further the objectives of a particular business function. 4,364 for six years. In this case, the court considered the meaning of âexpenditureâ under s. 10(2)(xv) of IT, Act 1922. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. Repair and maintenance of buildings used for factory and office of the company. You may click the link to find Multiple choice questions (Q.No-1 to 10) on Capital and Revenue Receipts and Payments.. The following objectives are covered in this lesson: This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. Capital Expenditure Capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset. Accounting For Management. If you find any problem while answering the questions we advise you to read Capital and Revenue Expenditures Chapter thoroughly from Financial Accounting section of Play Accounting. In order to extract oil, it has to buy exploration rights. The trustees were to spend this sum to take an annuity policy for the managing director. In the present case, nothing more was done in the accounting years. The court held that loan obtained cannot be treated as an asset or advantage of an enduring nature for the benefit of the business of the assessee, as, a loan is a liability and has to be repaid and it is therefore, erroneous to consider the liability as an asset or an advantage. The court held that the assessee has to employ professionals whose job is to continuously upgrade the software and provide newer features and updates on are gular basis. 1106 OF 1964, Supreme Court (cited +411 times). The capital and revenue expenditures should never be confused with one another as it can lead to classification errors which results in incorrect financial summary report. One must be clear in oneâs mind regarding the nature of an item of expenditure. In this case, the court considered the allowability of claim of expenditure of the assessee, on stamps, registration fees etc., for securing a loan, as business expenditure under section37(1) of the Act. A debt recorded as bad in the earlier year recovered during the year is a A] Revenue receipt B] Revenue expenditure C] Capital expenditure D] Capital receipt 11. The Assessee was engaged in the business of providing wireless solution for mobile consumers and enterprise. Deductions for Co-operative Societies: 5 questions and their answers, Peripheral Development Expenditure as part of CSR to be considered revenue expenditure | Riverus, DCIT vs BMR Business Solutions Pvt. 2,500 spent on the overhaul of machines purchased second-hand. Describe the effect on final accounts, mainly on net profit, if revenue expenditure is wrongly treated as capital expenditure and vice versa. Therefore, to ensure marketability of the existing repeated and constant cost had to be incurred to upgrade and remove glitches etc. Expenditure is a transaction, which is paid out and has gone irretrievably from the pockets of an assessee. legal low charges paid for the purchase of fixed assets. Its purchase is therefore a capital expenditure for EFG Company. Expenditures incurred to increase the useful life of a fixed asset. A capital expenditure is an amount spent to acquire or significantly improve the capacity or capabilities of a long-term asset such as equipment or buildings. Capital expenditure is expenditure relating to the purchase of non-current assets which are not for resale and are used within the business. The court decided in favour of the assesse holding that the expenditure incurred to operate the loom for longer working hours was primarily related to the operations of the loom and was an expenditure towards the profit-making apparatus. Explanations, Exercises, Problems and Calculators. The nature of the expenditure incurred in raising a loan would not depend upon the nature or purpose of the loan as the loan may be intended to be used for the purchase of raw material when it is negotiated but the company may, after raising the loan, change its mind and spend it on secured capital assets. Solved Example and Problem 2: The major difference between the two is that the Capital expenditure is a one-time investment of money. “There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down.It is not every advantage of enduring nature acquired by an assesse that brings the case within the principle laid down in this test. Expenditure means spending on something. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exacting.”, ITA 254 of 2013, Delhi HC (cited +720 cases). (a) Capital expenditures (b) Revenue expenditures (c) Capital receipt (d) Revenue receipt 20. The assesse company purchased mill hours from four other looms and claimed this as a revenue expenditure which was disputed by the Revenue. The question about the nature of expenditure has always been a highly contested issue in tribunals and courts in India. The test of enduring benefit is, therefore, not acertain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”, India Cements Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. The total capital expenditure in 1991-92 was Rs. Other transactions are of capital nature. To keep pace with the requirements and ensure product saleability, software development companies have to constantly incur expenditure to upgrade, improve and remove problem areas of the software. If a business wishes to grow, it needs to invest.. Capital expenditures involve larger monetary amounts that are too large to be expensed against a shorter revenue period. B] Revenue expenditure C] Capital expenditure D] Capital receipt 10. The term is generally restricted to expenditures that add fixed assets or that has the effect of increasing the capacity, efficiency, life span, or â¦ Post was not sent - check your email addresses! A capital expenditure (âCapExâ for short) is the payment with either cash or credit to purchase long term physical or fixed assets used in a businessâs operations. âIn our opinion, the payment was not merely contingent but the liability itself was also contingent. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. Assesse company purchased mill hours from four other looms and claimed this as a medium loan... Whole of the factory of fixed assets went up many times and currently stands at.... Is that the capital expenditure for the managing director circumstances of a given.... 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