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Questions and Answers
What is the classification of an amount spent on constructing temporary huts necessary for building a cinema house, which are demolished once the cinema house is ready?
Capital Expenditure
Is traveling expenses of directors on trips abroad for purchasing capital assets considered as Capital Expenditure or Revenue Expenditure?
Capital Expenditure
What is the classification of a lawyers' fee spent to defend a suit claiming the firm's factory site belongs to the plaintiff's land?
Revenue Expenditure
How would you classify the entrance fee received by Ram and Shyam Social Club?
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What is the classification of a subsidy received from the government for working capital by a manufacturing concern?
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Is an insurance claim received on account of an event considered as Capital Receipt or Revenue Receipt?
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What is the classification of interest on investments received?
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When is revenue from the sale of products ordinarily reported as part of the earning?
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What is the main difference between capital expenditures and revenue expenditures in terms of their impact on a business?
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Why is the renovation of cabins considered a capital expenditure?
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What is the nature of the expense incurred to recover installments due from a customer?
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Where are capital expenditures typically placed on the financial statements?
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Why is the expense incurred on account of transportation of a fixed asset considered a capital expenditure?
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What is the difference between a revenue receipt and a capital receipt?
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Why is the amount spent as a lawyer's fee to defend a suit claiming that the firm's factory site belonged to the plaintiff's land considered a capital expenditure?
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Why is the amount spent for replacement of a worn-out part of a machine considered a capital expenditure?
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What is the nature of expenditure incurred on the opening of a new unit?
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Should expenditure on travelling expenses of directors for purchasing capital assets be capitalized?
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Why is expenditure on demolition of a building to construct a bigger building on the same site considered capital expenditure?
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Is the amount paid to workers on voluntary retirement a capital or revenue expenditure?
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Why is an insurance claim received on account of damaged machinery considered a capital receipt?
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What is the nature of expenditure incurred on renovation of cabins in a restaurant?
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Is expenditure on legal expenses to recover outstanding installments a capital or revenue expenditure?
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What is the nature of expenditure incurred on purchasing a machinery?
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Study Notes
Capital Expenditure vs Revenue Expenditure
- Capital expenditures are shown in the balance sheet as assets, while revenue expenditures are shown in the profit and loss account.
- Capital expenditures generate benefits for more than one accounting period.
- Examples of capital expenditures:
- Renovation of cabins that increases the number of cabins.
- Transportation expenses for fixed assets.
- Expenses incurred for major repair of an asset to increase its productive capacity.
- Lawyer's fee to acquire property.
- Amount spent on demolition of a building to construct a bigger one.
Revenue Expenditure
- Revenue expenditures are normal recurring expenses of the business.
- Examples of revenue expenditures:
- Legal expenses incurred to recover installments due from customers.
- Inauguration expenses incurred on the opening of a new unit.
- Amount spent on replacement of worn-out parts of a machine.
- Expenses incurred to reduce running costs in the future.
Classification of Expenditures and Receipts
- Expenditures can be classified as capital or revenue based on their nature and impact on the business.
- Receipts can also be classified as capital or revenue.
- Examples of classification:
- Travelling expenses of directors for purchasing capital assets: Capital expenditure.
- Amount received from trade receivables: Revenue receipt.
- Amount spent on demolition of a building to construct a bigger one: Capital expenditure.
- Insurance claim received on account of damaged machinery: Capital receipt.
Prepaid Expenses
- Prepaid expenses are future expenses that have been paid in advance.
- They are shown in the balance sheet as an asset.
- Examples of prepaid expenses:
- Rent paid in advance.
- Insurance premium paid in advance.
Classification of Receipts
- Receipts can be classified as capital or revenue based on their nature and impact on the business.
- Examples of classification:
- Entrance fee received by a social club: Capital receipt.
- Subsidy received from the government for working capital: Capital receipt.
- Insurance claim received on account of damaged machinery: Capital receipt.
- Interest on investments received: Revenue receipt.
- Revenue from sale of products: Revenue receipt.
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