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Paper 1 Principles and Practices of Accounting Theoretical Framework 1.23
Rapid Fire Q&A
Questions Answers
1. Primary qualitative characteristics of 1. (b) Relevance and Reliability
financial statements are:
(a) Neutrality and understandability
(b) Relevance and reliability
(c) Understandability and materiality
2. The conservatism concept when applied 2. (b) Understatement of assets
to the balance sheet results in
(a) Overstatement of assets
(b) Understatement of assets
(c) Overstatement of capital
1.14 Capital Expenditure and Revenue Expenditure
The Revenue Expenditures are expenditures that relates to the regular and normal
operations of the business of an accounting period, benefits of which do not extend
beyond that accounting period.
Capital Expenditures (CapEx) are expenditures that result in generating enduring
benefits and help in revenue generation over more than one accounting period.
The classification of transaction into revenue and capital is done for the purpose of
placing them in profit and loss account or in the balance sheet.
EXAMPLE 1.4
Revenue expenditure are shown in the profit and loss account in the period they
incur as their benefits are for one accounting period.
CapEx are recorded on the asset side of the balance sheet as they will generate
benefits for more than one accounting period.
1.14.1. Considerations in Determining Capital and Revenue
Expenditure
a) Nature of Business
Nature of business is an important criterion for identifying whether an expenditure
is of revenue or capital nature. For a trader dealing in cars, purchase of a car is
revenue expenditure but for any other businesses, the purchase of it is treated as
capital expenditure and shown as an asset in the balance sheet.
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