CAPITAL & REVENUE EXPENDITURE
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Free sample — 8 of 65 rapid-fire Q&A cards.
What is capital expenditure in the context of banking and accounting?
Capital expenditure is spending that results in the acquisition of a long-term asset or improvement of an existing asset, thereby providing economic benefits over multiple accounting periods.
What is the primary test to determine if an expenditure is capital in nature?
It must provide enduring benefit beyond one accounting year.
How is revenue expenditure distinguished from capital expenditure?
Revenue expenditure is incurred to maintain the earning capacity of a business and is fully charged to the Profit & Loss Account in the period it is incurred, whereas capital expenditure is capitalised and depreciated over the asset's useful life.
How is revenue expenditure recorded in the financial statements?
It is charged entirely to the profit and loss account in the current year.
What accounting treatment is given to capital expenditure on the balance sheet?
Capital expenditure is recorded as a fixed or non-current asset on the balance sheet and is systematically written off through depreciation over the estimated useful life of the asset.
What type of expenditure increases the earning capacity of a business?
Capital expenditure increases earning capacity of a business.
Which accounting principle governs the distinction between capital and revenue expenditure?
The matching principle (accrual concept) governs this distinction, requiring that costs be matched to the period in which they generate revenue, so capital expenditure is spread over several periods through depreciation.
How should the cost of overhauling machinery to restore its original efficiency be classified?
It is revenue expenditure as it maintains, not enhances, the asset.
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