Question

A. Differentiate between revenue expenditure and capital expenditure

B. Classify the following transactions as revenue (Income) or capital in nature?

1. Sale of manufactured paints.

2. Contract to provide services to repair dilapidated building.

3. Purchase of raw material to manufacture garments.

4. Construction of a warehouse to house finished goods for distribution.

5. Proceeds of an insurance policy covering loss of profits for damage done to the business premises because of a fire.

6. Repairs of 90% of business complex that was damaged by fire

7. Removal of wooden partition and replacing it with concrete wall

8. Used car dealer replace his fleet of locally manufactured cars with imported SUVs’

Answer 1

Reveune expenditure/ income is an item which is incurred/ earned to support regular business operating activities for a specific accounting period.

Capital expenditure is an expense the benefit of which is available over a period lonfer than one accounting period. Also, it included expense incurred on asset which expands the capacity or increases the life of asset.

1. Sale of manufactured paints - Revenue nature as this is regular business activity

2. Contract to provide services to repair dilapidated building - Revenue nature since the this forms a part of regular annual repair activity of an old dilapidated building.

3. Purchase of raw material to manufacture garments - Revenue nature as this is regular business activity

4. Construction of a warehouse to house finished goods for distribution - Capital nature as the benefit of this warehouse would be available over a long period i.e. storing goods for years to come.

5. Proceeds of an insurance policy covering loss of profits for damage done to the business premises because of a fire - Revenue nature. The proceeds are recorded as Gain from insurance policy.

6. Repairs of 90% of business complex that was damaged by fire - Capital nature as this will increase the life of building which is otherwise completely damaged.

7. Removal of wooden partition and replacing it with concrete wall - Capital nature since this will improve the life of asset

8. Used car dealer replace his fleet of locally manufactured cars with imported SUVs - Revenue expenditure since this a part of regular business activity of car dealing.