![]() ![]() ![]() If it acquires stock-in-trade, then it is revenue expenditure. Expenditures are divided into three categories :Įxpenditure that acquires a capital asset is capital expenditure. It includes the purchase of capital or long-lived asset, goods for the purpose of sale or for getting services. Thus expenditure may or may not involve outflow of cash. Similarly, the Balance Sheet will not give a true and fair view of the assets and equity of the enterprise till the useful life of the asset is over assuming that the asset is not sold earlier.Īccording to Guidance Note on terms used in financial statements issued by ICAI, “Expenditure is incurring a liability, disbursement of cash or transfer of property for the purpose of obtaining assets, goods or services”. If the purchase of a depreciable asset, which is a capital expenditure, is treated as revenue expenditure it will understate the profit of the current year and overstate the profits of the subsequent years. For example, if a depreciable asset is purchased, the depreciation on that asset is charged to the Profit and Loss Account, and the written down value of the asset (or original cost of the asset less accumulated depreciation) is shown in the Balance Sheet. The distinction between capital and revenue items is important both from the Income Statement (Profit and Loss Account) as well as the Position Statement (Balance Sheet) point of view. The main functions of accounting include the ascertainment of profit/loss for an accounting period and financial position as at the end of that period. Capital and Revenue Expenditures and Receipts Capital and Revenue Expenditures and Receiptsġ.Topics covered in this Article are as follows: ![]()
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