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capital and revenue expenditure problems

December 30, 2020    

Remember Multiple choice questions are having good weightage in the total marks of … Horngren's Financial & Managerial Accounting, The Financial Chapters (6th Edition) Edit edition. Capex approval processes are not fully deducted during the accounting period they were incurred in, but rather depreciated to spread this cost over the useful life of the asset. How to account for capital expenditure and revenue expenditure. Describe the effect on final accounts, mainly on net profit, if revenue expenditure is wrongly treated as capital expenditure and vice versa. It is the process of causing a liability by a commodity. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of its test.If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. 4,364 for six years. Revenue expenditure: It refers to the amount spent on normal maintenance and repairs of fixed assets to generate revenue in the current period. One must be clear in one’s mind regarding the nature of an item of expenditure. 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. 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 as… This would be capital ? The expenditure incurred for availing loan was held to be allowable u/s 37(1)of the Act. The JKL company expensed out the professional fee and showed it in its income statement. The director was alive then and it was not known whether any pension would be payable to him at all. a) What is the effect if Capital expenditure is incorrectly recorded as Revenue . Expenditure means spending on something. The state of the art in some of these areas of high priority research is constantly up dated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualification of an enduring capital asset. These expenditures are capitalized when incurred and are made a part of company’s balance sheet at the end of accounting period. The question about the nature of expenditure has always been a highly contested issue in tribunals and courts in India. 25612 Crore. The trustees were to spend this sum to take an annuity policy for the managing director. Other transactions are of capital nature. paying for materials, staff costs) which is known as "revenue expenditure".The distinction between capital and revenue expenditure is quite an important one. Capital and revenue expenditures are two different types of business expenditures that we often find in financial accounting and reporting. Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. Questions from 11 to 20. The dispute related to the sums transferred by the assesse-company to trustees to take an annuity policy for the managing director. carriage and freight paid on the purchase of fixed assets. Distinguish between capital and revenue expenditure 2. Receipts and invoices keep the records of expenditures. For example: revenue expenditures are shown in the profit and loss account as their benefits are for one accounting period i.e. 43 OF 1975, Supreme Court (cited +410 times). 221,246 Crore in 2016-17, thus registering almost 10 times increase. 395 OF 1957, Supreme Court (cited +270). Show your love for us by sharing our contents. It is important to correctly differentiate between the two. It provides benefits in the future period. Ltd. - Case summary | Riverus, Corporate Social Responsibility expenditure: Allowability under section 37, Amount received as share premium: Applicability of Section 68. Let us learn more about them. There should be no possibility of funds forming a part of the funds of the assessee. I assume all the above will be revenue expenditure. The court held that the test of long and enduring benefit cannot be applied in the current case, for classifying the transaction as a capital expenditure. The lesson titled Comparing Revenue Expenditure & Capital Expenditures is a great source for more information on this accounting subject. Capital expenditures are business expenditures the benefit of which can be utilized or enjoyed by the business for more than one financial year. In pursuance of this, the company executed a trust deed in favour of three trustees to whom it paid a lump sum of Rs 8,208 and further undertook to pay annually Rs. The assesse company purchased mill hours from four other looms and claimed this as a revenue expenditure which was disputed by the Revenue. 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. I am going to recommend it to my students. Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. In order to extract oil, it has to buy exploration rights. 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. 1106 OF 1964, Supreme Court (cited +411 times). 3. Expenditures incurred to increase the useful life of a fixed asset. The business expenditures are of two types:- Capital expenditures Revenue expenditures Capital expenditures Definition and explanation of capital expenditures: An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. 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. Every expenditure has its own purpose from the business point of view and the classification between the capital expenditures and revenue expenditures is the most regular common problem for accountants since it has a significant impact on financial statements. (d) Capital Expenditure = Purchase of business means purchase of its assets and liabilities; therefore, it is a capital expenditure. The nature of such expenditure was called in question. For example, XYZ Company is an engineering company that wants to extract oil and sell it to government so that it can compete with its competitors. Questions from 1 to 10. 2020 © Riverus Technology Solutions Pvt Ltd. All Rights Reserved // Theme: Prefer by. Revenue expenditures are usually less expensive than capital expenditures, small enough to be expensed against a shorter revenue period. In the present case, nothing more was done in the accounting years. Capital expenditure is expenditure relating to the purchase of non-current assets which are not for resale and are used within the business. Sorry, your blog cannot share posts by email. The budget was approved for the purchase of new plant. 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. They are expensed out when incurred and are not made part of the balance sheet but rather shown in income statement of the company. Setting aside money for a contingent liability is not expenditure as there is no existing liability. Professional services fee paid by the company. 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. Question 1: Difference Between Capital And Revenue Expenditure. This was not covered by insurance. What is a capital expenditure versus a revenue expenditure? The differences between capital expenditures and revenue expenditures include whether the purchases will be used over the long-term or short-term. 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. In this case, the court considered the meaning of “expenditure” under s. 10(2)(xv) of IT, Act 1922. “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. Indian Molasses Co. Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. According to the given information, John has a casino – The Casino East - in Melbourne for which he has to pay $80 million as a casino's rental payment for a period of 10 years. B] Revenue expenditure C] Capital expenditure D] Capital receipt 10. Explore the other resources for Capital and Revenue Expenditure. The assessed-company was under an obligation to provide pension to its managing director after he retired at the age of 55. Repair and maintenance of buildings used for factory and office of the company. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. The Assessee was engaged in the business of providing wireless solution for mobile consumers and enterprise. (a) Capital expenditure (b) Revenue expenditure Multiple Choice questions on Capital Expenditure and Revenue Expenditure. Capital expenditure: It refers to the amount spent on acquiring, maintaining, and improving the fixed assets that increases its productivity or extends useful life. After completing this chapter, you should be able to : 1. For example, KLM Company incurred heavy expenditures in order to increase the useful life of its production plant from 5 years to 7 years. Financial charges on loan given or undertaken by the company. Definition of Capital Expenditure. Revenue expenditures are business expenditures the benefit of which is utilized by the business within one financial year. 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. Depreciation on furniture, equipment, plant, machinery and other fixed assets. Interactive Past Paper Multiple Choice Questions Practice: Set-1 2. If a business wishes to grow, it needs to invest.. Accordingly, the expenditure was held to be revenue expenditure. 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. The major difference between the two is that the Capital expenditure is a one-time investment of money. Explanations, Exercises, Problems and Calculators. Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only. Therefore, to ensure marketability of the existing repeated and constant cost had to be incurred to upgrade and remove glitches etc. ... Case 3-81 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT Cam and Anna are very satisfied with their first month of... Cornerstones of Financial Accounting. Also Read: Can deduction u/s 80-IA be claimed if the contract is awarded to Joint Venture formed by the assessee? Capital expenditures involve larger monetary amounts that are too large to be expensed against a shorter revenue period. The procurement department purchased the fixed assets from an approved supplier and intimated the finance department about the transaction which carried the total costs of the acquired asset to balance sheet of the company. 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. Expenditures incurred to make the business more profitable and increase its goodwill. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. Solved Example and Problem 2: 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. 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. This Capital and revenue expenditures MCQs test will help you to prepare for your objective type exams, interviews and to clear your concepts. Suppose, the JKL company hired a professional bug exterminator firm to get rid of all the insects manifesting in their production facilities. Worksheet-1: Capital and Revenue Expenditure 3. Day-to-day expenses incurred by the company. is treated as capital expenditure. This Explanation Very Useful to me. 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. 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: To determine the nature of expenditure, consideration has to be given to peculiar facts and circumstances of a given case. It was held that this payment by the company was contingent and therefore not deductible for income tax purposes. Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business or in order to … 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 term is generally restricted to expenditures that add fixed assets or that has the effect of increasing the capacity, efficiency, life span, or … To determine the nature of expenditure, consideration has to be given to … Every year, a part of the asset is “used up”. The money was placed in the hands of trustees and/or the insurance company to purchase annuities of different kinds, if required, but to be returned if the annuities were not bought and the setting apart of the money was not a paying out or away of these sums irretrievably.”, Empire Jute Co. Ltd. vs.Commissioner Of Income Tax, Civil appeal no. 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). 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. 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. The members of association entered into an agreement restricting the number of working hours per week to run their looms. 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. Its purchase is therefore a capital expenditure for EFG Company. The test of long and enduring benefit cannot be applied where the advantage consists of facilitating the assesse’s trading operations, leaving the fixed capital untouched. The total capital expenditure in 1991-92 was Rs. business expense that is made to acquire an asset or to improve the capacity of an asset (Written by Anuj Sharma, Product Counsel @ Riverus). In accounting and finance these expenditures are also termed as CapEx. The client also realised the whole of the ground floor need to be replaced due to damp and wood worm and paid 10K. Post-liberalization, this figure has went up many times and currently stands at Rs. (a) Capital expenditures (b) Revenue expenditures (c) Capital receipt (d) Revenue receipt 20. 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. 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. Failure to make distinction between capital and revenue items will result in A] under trading Material Facts About John’s Prepaid Rent. Amount received from IDBI as a medium term loan for augmenting working capital. Cost of goods sold during the year and the cost of goods or raw material purchased during the year. 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. Capital and revenue expenditures are two different types of business expenditures that we often find in financial accounting and reporting. Expenditure is a transaction, which is paid out and has gone irretrievably from the pockets of an assessee. Accounting For Management. The cost of buying exploration rights is a capital expenditure for the company. On the contrary, revenue expenditure … 1191 OF 1974, Supreme Court (cited +230 time). Capital Expenditure vs Revenue Expenditure. (c) Capital expenditures (d) Revenue expenditures 19. Incorrect treatment of expenditure . Expenses incurred to maintain the fixed assets in working order. legal low charges paid for the purchase of fixed assets. The following objectives are covered in this lesson: (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. The plant is a fixed asset that will be used for many years by the company. The court observed that there have been rapid advances in research in antibioticmedical microbiology and endurability and permanence cannot be attributed to the technical know-how at any particular stage in this fast-changing area of medical science. “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 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. Suppose in a board meeting of EFG company, the purchase of a new plant was proposed for the newly opened production facility in another city. The benefits of revenue expenditures usually expire within one financial year and their budget is smaller as compared to capital expenditures. In case the expenditure is not incurred on the said capital asset the same would become unsalable and obsolete. 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. A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this Court in many cases.”, CIVIL APPEAL NO. Can deduction u/s 80-IA be claimed if the contract is awarded to Joint Venture formed by the assessee? Capital receipt and revenue receipt, both are the very important components of accounting. The purchase of loom hours did not create any new assets nor was there any expansion of the factory. Post was not sent - check your email addresses! The expenditure Expenditure An expenditure represents a payment with either cash or credit to purchase goods or services. Depreciation on a Machinery. For example, carriage, office, admin, and stationary expenses e.t.c. Capital and revenue expenditures Quality Move Company made the following expenditures on one of its delivery trucks: Prepare journal entries for each expenditure. Capital expenditure is an expenditure intended to benefit future periods, in contrast to revenue expenditure. You may click the link to find Multiple choice questions (Q.No-1 to 10) on Capital and Revenue Receipts and Payments.. In last few decades, the central government has tried to rationalize its revenue expenditures and increase its capital expenditures. Classification of these transactions reflects in the final statements of the company. expenditure? Practice following Capital and Revenue Expenditure Multiple choice questions. Thanks For This, Copyright 2012 - 2020. Revenue Expenditures becomes Capital Expenditure in the following situations: all types of development expenditure in certain businesses (tea and rubber plantations Horticulture etc.) This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. Here, we have discussed most important cases explaining the concept of expenditure. Characterising an expenditure as revenue or capital has tax implications. 2,500 spent on the overhaul of machines purchased second-hand. A capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase long term physical or fixed assets used in a business’s operations. Capital expenditure may include the following expenditures:- Expenditure incurred on the … 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. 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. In the said case, assesse was a company carrying on the business of manufacture of jute and was a member of Indian Jute mills association. “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. It provides benefits only in the current period. One of the examples of revenue expenditure which could serve as a … “In our opinion, the payment was not merely contingent but the liability itself was also contingent.

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