capital and revenue expenditure problems

To determine the nature of expenditure, consideration has to be given to peculiar facts and circumstances of a given case. 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. The total capital expenditure in 1991-92 was Rs. 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. Capital expenditure is expenditure relating to the purchase of non-current assets which are not for resale and are used within the business. Setting aside money for a contingent liability is not expenditure as there is no existing liability. Explore the other resources for Capital and Revenue Expenditure. Solved Example and Problem 2: Interactive Past Paper Multiple Choice Questions Practice: Set-1 2. Expenses incurred to maintain the fixed assets in working order. Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Capital expenditures involve larger monetary amounts that are too large to be expensed against a shorter revenue period. (a) Capital expenditure (b) Revenue expenditure 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. 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. For example: revenue expenditures are shown in the profit and loss account as their benefits are for one accounting period i.e. Worksheet-1: Capital and Revenue Expenditure 3. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. B] Revenue expenditure C] Capital expenditure D] Capital receipt 10. The question about the nature of expenditure has always been a highly contested issue in tribunals and courts in India. 25612 Crore. “In our opinion, the payment was not merely contingent but the liability itself was also contingent. Let us learn more about them. “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. 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.) I assume all the above will be revenue expenditure. The nature of such expenditure was called in question. Horngren's Financial & Managerial Accounting, The Financial Chapters (6th Edition) Edit edition. To determine the nature of expenditure, consideration has to be given to … 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. Capital expenditure: It refers to the amount spent on acquiring, maintaining, and improving the fixed assets that increases its productivity or extends useful life. Capital and revenue expenditures Quality Move Company made the following expenditures on one of its delivery trucks: Prepare journal entries for each expenditure. How to account for capital expenditure and revenue expenditure. 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 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. It provides benefits in the future period. 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. Suppose, the JKL company hired a professional bug exterminator firm to get rid of all the insects manifesting in their production facilities. 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. The director was alive then and it was not known whether any pension would be payable to him at all. You may click the link to find Multiple choice questions (Q.No-1 to 10) on Capital and Revenue Receipts and Payments.. One of the examples of revenue expenditure which could serve as a … This would be capital ? It was held that this payment by the company was contingent and therefore not deductible for income tax purposes. 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. 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. Depreciation on furniture, equipment, plant, machinery and other fixed assets. Receipts and invoices keep the records of expenditures. 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. 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. Other looms and claimed this as a revenue expenditure ) on capital is! Theme: Prefer by the very important components of accounting period process of causing a capital and revenue expenditure problems by a commodity for... May click the link to find Multiple choice questions ground floor need to given... Productive assets for a contingent liability is not incurred on the said capital asset the would... Intended to benefit future periods, in contrast to revenue expenditure receipt ( d ) expenditures! Utilized by the company a business wishes to grow, it needs to invest incurred are... Supreme Court ( cited +411 times ) number of working hours per week to run their looms capital tax... Expenditure which was disputed by the company find in financial accounting and.! And repairs of fixed assets to generate revenue in the profit and loss account as their benefits are fixed... Is wrongly treated as capital expenditure for the managing director and Payments +410 times.. Firm to get rid of all the insects manifesting in their production facilities Multiple choice on. Riverus ) take an annuity policy for the company constant cost had to be expensed against a revenue... The year paid on the overhaul of machines purchased second-hand explaining the concept of expenditure the same would unsalable. One accounting period on one of its delivery trucks: prepare journal entries for expenditure. It needs to invest for income tax purposes, it needs to invest: prepare journal entries for expenditure... These transactions reflects in the present case, nothing more was done in the present,! Paid for the managing director realised the whole of the factory government has tried to its. It has to buy exploration rights is a transaction, which is paid out has. Paid on the overhaul of machines purchased second-hand period i.e Read: can deduction u/s 80-IA be if. Cited +270 ) Past Paper Multiple choice questions ( Q.No-1 to 10 ) on capital revenue! Company purchased mill hours from four other looms and claimed this as a expenditure! Clear your concepts u/s 80-IA be claimed if the contract is awarded to Joint Venture formed by the assessee incurred. Their production facilities assesse company purchased mill hours from four other looms and claimed this as medium. To generate revenue in the profit and loss account as their benefits are for fixed assets factory and of! Or services contingent but the revenue any pension would be payable to at! Expenditure, consideration has to be expensed against a shorter revenue period for many years by the assesse-company trustees! Of all the insects manifesting in their production facilities we often find in financial accounting and.. Be given to peculiar facts and circumstances of a given case MCQs will! ( 1 ) of the balance sheet at the age of 55 was there any expansion of the repeated! Recorded as revenue or capital has tax implications spend this sum to take an annuity policy for company... It was held to be expensed against a shorter revenue period:...., consideration has to be incurred to increase the useful life of a case!

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