Question

Define the following accounting terms：

1. Depreciation

2. Capital expenditure

3. Revenue expenditure

Answer 1

1. Depreciation

Depreciation is the decrease in the value of asset due to usage, wear and tear, time and other factors.

When an business incurs expenditure it is shown in the income statement of the company. But when an asset is purchases it is shown in the balance sheet. Assets value decreases day by use of use, time and various factors. To accommodate this change the asset value should be reduced. That reduction in asset value is called depreciation.

2. Capital expenditure

Capital expenditures are expenses made by the company for buying, acquiring and maintaining the fixed assets of the enterprise.

The cost of the asset, the expenses till the asset is put to use, repair and maintenance of asset etc are huge expenses which cannot be taken to income statement of a year which will lead to huge loss. It is shown in the balance sheet and depreciated over time of asset use.

3. Revenue Expenditure

The expenditure incurred by the enterprise for the conduct of business other than capital expenditure is revenue expenditure.

The expenditure which is charged to income statement against the revenue to arrive at the net income of the company is revenue expenditure. Materials, labor, salary, rent , depreciation are examples of revenue expenditure.