Page 154 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes
Example: State whether the following expenditure is of capital or revenue nature:
1. 2,000 spent on repairing of a second hand plant.

2. 15,000 spent on air conditioner in an office.
3. 10,000 spent on advertizing in connection with the introduction of a new product.
4. 100 paid for carriage of goods purchased.
5. Salary of 5,000 paid to an employee of the business.

6. A sum of 5,000 was paid as compensation to an employee who was retrenched.
7. Purchase of raw materials for 25,000.
Solution:

Amount Spent Nature of Expenditure
1. Spent on repairing of a second hand 1. It is of capital nature because it makes the plant in
plant. working condition, hence it is a capital expenditure.
2. Spent on air conditioner in an office. 2. It is of capital nature because an asset of permanent
nature is purchased, hence it is a capital expenditure.
3. Spent on advertizing in connection with 3. It is of capital nature because benefits of it will be
the introduction of a new product. available for number of years, hence, it is capital
expenditure.
4. Paid for carriage of goods purchased. 4. It is of revenue nature because goods purchased are
for resale hence it is a revenue expenditure.
5. Salary paid to an employee. 5. It is of revenue nature as it is necessary to run the
business.
6. Paid compensation to an employee. 6. It is of revenue nature as it is necessary for the
business.
7. Purchases of raw Materials. 7. It is of revenue nature as it is necessary to run the
business.

Example: Classify the following expenditure into capital and Revenue expenditure:
(i) Expenditure towards additions to machinery, in order to double the production:
4000.

(ii) Expenditure necessitated by the negligence of the employees incurred for repairs to
Machinery: 2400.
(iii) Expenditure of 1600 towards replacement of worn out parts of machinery.

(iv) Expenditure incurred on painting the factory premises: 1,000.
Solution:
(i) Capital Expenditure as it increases the value of Machinery.
(ii) It is revenue expenditure as the nature of expenditure is revenue type.

(iii) It is revenue expenditure as the nature of expenditure is revenue because of replacement
of a worn out parts of Machinery.
(iv) It is also revenue expenditure as the expenses are incurred every year for the painting of
the factory premises to make the premises neat, clean and healthy.

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