Page 155 - DMGT104_FINANCIAL_ACCOUNTING

Unit 8: Financial Statements

Notes
Example: State in each of the following cases whether the expenditure is a capital
Expenditure or revenue expenditure or deferred revenue expenditure:
(i) Legal expenses incurred to defend a suit for breach of a contract to supply goods.
(ii) Custom duty paid on Imported Machinery.
(iii) Heavy expenditure incurred on advertising a new product.

(iv) Amount spent to overhaul a motor truck purchased second hand.
(v) Wages paid to workers for converting raw materials into finished products.
(vi) Wages paid to workers for setting up new machinery.
(vii) Office rent paid in advance for three years.

(viii) Expenditure on development of a product.
Solution:
(i) It is revenue expenditure because it is incurred in the normal course of business.
(ii) It is a capital expenditure because it adds to the cost of imported machinery.

(iii) Deferred revenue expenditure because the benefit of this expenditure will be available for
number of years. The proportionate amount will be written off every year.
(iv) It is a capital expenditure because the expenditure incurred will improve the present
condition of the motor truck.
(v) It is revenue expenditure as it has been incurred in the normal course of the business.
(vi) It is a capital expenditure because this is incurred to put an asset into working condition
and such expenditure is capitalized also.
(vii) It is deferred revenue expenditure because the right does not expire in the accounting
period in which it is paid; only a proportionate part of rent paid is to be treated as revenue
expenditure and balance should be carried forward as an asset to be written off in subsequent
years.
(viii) It is revenue expenditure as it is incurred in the normal course of business.

Self Assessment

Fill in the blanks:
3. If expenditure is incurred in the business to get its benefit for a long period, such expenditure
is called …………………….
4. When expenditure is done for a short period (less than one year) and for the regular
operation of business, it is termed as …………………….
8.4 Statement of Accounting Standard (AS-9) Revenue Recognition

The following is the text of the Accounting Standard (AS) 9 issued by the Institute of Chartered
Accountants of India on ‘Revenue Recognition’.

In the initial years, this accounting standard will be recommendatory in character. During this
period, this standard is recommended for use by companies listed on a recognised stock exchange
and other large commercial, industrial and business enterprises in the public and private sectors.

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