Page 42 - DCOM101_FINANCIAL_ACCOUNTING_I

Financial Accounting-I

Notes 3. Expenditure incurred for extension or improvement of an existing fi xed asset

Example: Money spent in connection with increasing the seating capacity of a cinema
hall or constructing an additional room.
4. Expenditure incurred for the major repairs of an old asset

Example: Repairs for reconditioning a machinery.
5. Expenditure incurred for the replacement of an old asset with a new asset.

Example: Replacing a hand-driven machine by automatic machine.
Revenue Expenditure

An expenditure incurred in the course of regular business transactions of a concern is availed
during the same accounting year is known as Revenue Expenditure. Following are some of the
examples, of Revenue Expenditure.

1. Expenditure incurred on the purchase of raw materials.
2. Expenditure incurred in the day-do-day running of business,

Example: Wages, salaries, rent, rates and taxes, office expenses, interest, discount, etc.

3. Expenditure incurred for the upkeep of an asset

Example: Repairs, maintenance charges, etc.
4. Expenditure incurred for the purchase of goods meant for sale

Example: Purchases, carriage inwards, import duty, octroi, etc.
5. Depreciation of fi xed assets.
The above examples are not exhaustive and are not universally accepted. Whether an
expenditure is capital expenditure or revenue expenditure depends upon its purpose and
nature of the business.

Example: 1. Amount spent on the purchase of furniture is a capital expenditure but
it is revenue expenditure for a business dealing in furniture.
2. Amount spent on Plant and Machinery is a capital expenditure but it is
revenue expenditure for a business dealing in engineering goods.
3. Amount spent on wages or carriage are revenue expenditure, but when
wages are paid for the installation of a new machinery or carriage paid to
bring the machine to the place of business, they are capital expenditure
as they increase the value of fixed asset i.e. machinery here.

Deferred Revenue Expenditure

There are certain revenue expenditures that are incurred during one accounting year but are
applicable wholly or in part in future periods such as heavy expenditure on advertisement for
introducing a new product in the market or for exploring new markets for the product. These
expenditures appear to be revenue expenditure. But it is not so because the benefi t from this is

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