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1.24 Theoretical Framework Principles and Practices of Accounting Paper 1
b) Recurring Nature of Expenditure
Frequent/Recurring Expense – Revenue Expenditure
Example: Salary, rent
Non-recurring expenditure – CapEx
Example: Purchase of a machinery
c) Purpose of Expense
Determining the nature of expenditure based on the purpose is not always simple.
Example:
Repair of machine for maintenance (if no future economic benefit accrues) – Revenue
Expenditure
Major Repair to machine (if expected benefit from the asset increases) – CapEx
d) Effect on Revenue Generating Capacity of Business
Expenses incurred generate revenue in the current period – Revenue Expenditure
Expenses incurred generate revenue over a period of time (more than a year) – CapEx
e) Materiality
Another important consideration is the proportion of the amount involved for dis-
tinction between revenue and capital.
Rapid Fire Q&A
Questions Answers
State whether True or False
1. Overhaul expenses of second-hand 1. True. Overhaul expenses derive long-
machinery purchased are capital expen- term advantage. CapEx
diture.
2. Expenses on repairs and white washing 2. True. These expenses are incurred to
for the first time on purchase of an old put the building in usable condition. These
building are CapEx. are the part of the building cost. CapEx.
3. Expenses incurred on white washing the 3. True. These are routine expenses and
house every year is a revenue expendi- do not add to value of the asset. Hence,
ture. revenue expenditure.
4. Expense incurred for the construction of 4. False. Cost of temporary huts con-
temporary huts, which were necessary for structed necessary for the construc-
construction of the Shopping Complex and tion of Shopping Complex is part of the
were demolished when the Shopping Com- construction cost. CapEx.
plex was ready, is revenue expenditure.
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