Page 42 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes The above examples are not exhaustive and are not universally accepted. Whether 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 benefit from this is
likely to the enjoyed over a number of years. Such expenditure whose benefit is enjoyed not in
one year but over a number of years is known as deferred revenue expenditure. It is a fictitious
asset. At though it appears in balance sheet on asset side, it is really not an asset to business.

Example:
1. Heavy initial expenditure incurred on Advertisement for introducing a product in
the market.
2. Expenditure incurred in shifting business to more convenient premises.
3. Expenditure incurred on research and development

Task Choose the right kind of expenditure by putting a Tick Mark in correct
column:

Expenditure Capital Deferred
Revenue Revenue
1. Salaries
2. Legal Charges
3. Wages for installing a machinery
4. Depreciation
5. Repairs of furniture purchased second hand
6. Advertisement for introducing a new product
7. Carriage paid on goods purchased
8. Research & Development expenditure
9. Expenditure on dismantling and reinstallation of Plant
10. Office expenses
11. Expenditure on the construction of an additional room
12. Maintenance charges of building

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