Question

Discuss how to distinguish between the accounting for capital expenditures and revenue expenditures.

Answer 1

Capital expenditures are capitalised to the asset account where as revenue expenditure and charged to statement of profit and loss. Capital expenditure are shown in balance sheet but revenue expenditures are debited to profit and loss account. Capital expenditures are those expenditures whose benefits are derived over certain period of time in future but Revenue expenditures are those expenditure which are incurred for day to day expenses and smooth running of business.

For example, Say machinery is purchase at $10000 and life of machine is 10 years. Installation cost of machine is $500. Salary paid to supervisors for machine is $2000. In this case, machinery purchase cost and installation cost is capital expenditure and total amount of Purchase cost and installation cost i.e. 10000 + 500 = 10500 is shown in the balance sheet of company as Tangible - Fixed assets" . This capital expenditure of $10500 will benefit to the company for 10 years because life of machine is 10 years. Salary paid to supevisor of $2000 is revenue expenditure and it will be debited to Statement of profit and loss. Benefits to be derived from supervisor's salary is only for one year and Statement of profit and loss is periodical statement and prepared only for 1 year. So, salary paid to supervisor is revenue expenditure and to be debited to Statement of Profit and Loss.