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MGT 101

GDB 1

 

 

DISCUSSION SCENARIO:


During the month of October 2015, a limited company paid following expenditures through its bank account:

1. Purchase of machinery Rs. 10,000,000

2. Rent of the office building Rs. 120,000

Mr. Aslam - a newly hired junior accountant of the company recorded the above expenditures in profit and loss account as he was unaware about the difference between capital and revenue expenditures. This adversely affected the company’s profitability due to overcharging of certain expenditures.

Answer the following:

a)  Identify the nature of above expenditures as to capital or revenue?                     

b)  Suggest a correct accounting treatment of the above expenditures in the financial statements       

c)  Why is such distinction necessary in preparation of financial statements?

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a) Capital Expenditure.
Capital expenditure decisions involve acquisition of assets thah have a long life span and which provide benefits spread over a long period of time is called capital expenditure.
b) Revenue Expenditure.
Expenditure for ordinary repairs maintenance, fuel and other items necessary the ownership and use for plant and equipment are called revenue expenditures.

B) 
a)Purchase of Machinery
Asset(Dr)
Bank (cr)
b) Rent of the Office Building
Rent (Dr)
Bank (Cr)
C) Rent is for the year use its expense out in a year and asset for machinery is capital in nature its depreciate for the life time in the income statement.

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