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Class 11
Accountancy
Financial Statements - 1
distinguish between capital and revenue expenditur...

Question:
Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure :
(a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable.
(b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order.
(c) Registration fees paid at the time of purchase of a building.
(d) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years.
(e) Depreciation charged on a plant.
(f) The expenditure incurred in erecting a platform on which a machine will be fixed.
(g) Advertising expenditure, the benefits of which will last for four years.

Answer:

When the benefit of expenditure is to be received over a series of accounting years, it is termed as capital expenditure. Account incurred on purchase of fixed assets like land and building, plant and machinery, patents,trademark etc is termed as capital expenditure because the benefit is to be received over a number of years.

On the other hand, when the benefit of expenditure is confined to a short period of time, normally a year, it is termed as revenue expenditure. e.g., rent of building, salaries, insurance premium, wages,audit fees etc.

(a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable.
Ans:- (Capital Expenditure)

(b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order.
Ans:- (Capital Expenditure).

(d) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years.
Ans:- (Revenue Expenditure).

(e) Depreciation charged on a plant.
Ans:- (Revenue Expenditure).

(f) The expenditure incurred in erecting a platform on which a machine will be fixed.
Ans:- (Capital Expenditure).

(g) Advertising expenditure, the benefits of which will last for four years.
Ans:- (Revenue Expenditure).

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Mr. Sunrise started a business for buying and selling of stationery with ₹ 5,00,000 as an initial investment. Of which he paid ₹ 1,00,000 for furniture, ₹ 2,00,000 for buying stationery items. He employed a sales person and clerk. At the end of the month he paid ₹ 5,000 as their salaries. Out of the stationery bought he sold some stationery for ₹ 1,50,000 for cash and some other stationery for ₹ 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery items of ₹ 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost ₹ 30,000 worth of stationery. A part of the machinery, which cost ₹ 40,000, was sold for ₹ 45,000.

From the above, answer the following :
1. What is the amount of capital with which Mr. Sunrise started business?
2. What are the fixed assets he bought?
3. What is the value of the goods purchased?
4. Who is the creditor and state the amount payable to him?
5. What are the expenses?
6. What is the gain he earned?
7. What is the loss he incurred?
8. Who is the debtor? What is the amount receivable from him?
9. What is the total amount of expenses and losses incurred?
10. Determine if the following are assets, liabilities, revenues, expenses or none of the these: sales, debtors, creditors, salary to manager, discount to debtors, drawings by the owner.

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(e) ..................... users are groups outside the business entity, who uses the information to make decisions about the business entity.
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