Capital & Revenue Account MCQ Quiz in தமிழ் - Objective Question with Answer for Capital & Revenue Account - இலவச PDF ஐப் பதிவிறக்கவும்

Key Points

Capital expenditure

• Capital expenditures are costs incurred by an organization with the intention of generating long-term benefits. By enhancing or acquiring new assets for the organization, these expenses assist to increase the capacity or capabilities of the long-term asset.
• On the asset side of the balance sheet, these expenses are added. It is generally done on items like land, machinery, furniture, or cars that assist the organization gain advantages by enhancing its operational competence.

Revenue expenditure

• The cost incurred by a company to operate the daily operations of a business, such as paying employees, maintaining inventory, paying rent and energy, purchasing office supplies, and paying taxes, is referred to as revenue expenditure.
• These are the costs that do not contribute to the creation.

Important Points

Statement 1: The amount spent by way of lawyer's fees to defend a suit in which a firm's factory site is claimed to be related to the plaintiff's land is treated as capital expenditure.

• The amount spent by way of lawyer's fees to defend a suit in which a firm's factory site is claimed to be related to the plaintiff's land is treated as revenue expenditure and not capital expenditure because expense which is incurred to safeguard the interest of the business is treated as revenue expenditure.
• Thus, amount spent on lawyer's fees to defend a suit in which a firm's factory site is a revenue expenditure.

Hence, Statement 1 is incorrect.

Statement 2: Purchase of second-hand machinery Rs. 10,000 is treated as revenue expenditure on overhauling.

• The purchase of second-hand machinery for Rs. 10,000 is treated as Capital expenditure, not revenue expenditure. 
• Purchase of a second-hand machine is a capital expenditure, but repair expenses incurred on it after installation will be revenue expenditure because of its recurring type.

Hence, Statement 2 is incorrect.

Statement 3: The amount spent to reduce the working expenses is treated as revenue expenditure.

• The amount spent to reduce the working expenses is treated as Capital expenditure, not revenue expenditure because the capital expense is the money a company spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land.
• In this case, the amount spent to reduce working expenses is the improvement of assets. So, it will be considered as capital expenditure.

Hence, Statement 3 is incorrect.

Statement 4: Paid to acquire the property Rs. 10,000 is treated as capital expenditure on legal fees.

•  For Purchasing immovable property, one has agreed to pay the stamp duty, registration fee, and transfer fees (if applicable). These certainly form part of the cost of acquisition. 
• The buyer of the property also is paying expenses such as brokerage and legal fees.
• All these mentioned costs are included in the cost of the property. So it is considered the capital expenditure 

Hence, Statement 4 is correct.

Hence, Paid to acquire the property Rs. 10,000 is treated as capital expenditure on legal fees is correct.

Cost incurred for the maintenance of shop is considered as Revenue expenditure.

Key Points

• Cost incurred for the maintenance of shop is a regular and recurring expense for the business, and it is used up within the current accounting period.
• Hence, it is treated as a revenue expenditure.
• Revenue expenditure refers to the expenses incurred by the business in its day-to-day operations to generate revenue.
• These expenses are shown in the income statement and reduce the profits of the business.

Additional Information

• Deferred expense: This refers to the expenses incurred in the current period but paid in advance for future periods. Example: Advertising Expense.
• Capital expenditure: This refers to the expenses incurred to acquire an asset that will provide a benefit to the business over a long period. Example: Purchase of machinery.
• Preliminary expense: This refers to the expenses incurred during the formation of a company, such as legal fees, registration fees, etc. These expenses are shown in the balance sheet and are amortized over a period of time.

The correct answer is a Cartage of Rs. 1,000 paid for shifting of inventory. Key Points

• Revenue expenditure, also known as operating expenditure, refers to the costs a business incurs through its normal business operations.
• These are expenditures that provide immediate benefits rather than long-term benefits.
• The primary characteristics of revenue expenditure include:
  • They are recurring, which means they are repeated periodically, e.g., daily, monthly, quarterly, or annually.
  • The benefit of revenue expenditure is received within the same accounting year in which the payment was made.
  • These expenses are for maintaining the earning capacity of the business and keeping it running smoothly.
  • It's matched against the revenue and is fully written off in the profit and loss account during the accounting period in which it is incurred.
• Cartage expenses incurred for shifting of inventory are treated as revenue expenditure because it is not creating any long-term benefit, rather it is a routine operational cost related to the transport of goods or inventory within the course of ongoing business operations.
• These costs are usually expended completely within the accounting period in which they are incurred.

Additional Information

• Money spent as travelling expenses of an employee on abroad trips for purchase of capital assets: 
  • At a glance, this might seem like a revenue expenditure because travel expenses are typically considered such.
  • However, these particular travel expenses are incurred in the process of acquiring capital assets.
  • As such, they're more accurately classified as capital expenditures because they are indirectly adding to the cost of the capital asset.
• Amount spent on the construction of a house:
  • This is considered a capital expenditure because it involves the creation of a long-term asset (the house).
  • The benefits from this expenditure (in this case, the usability and potential resale value of the house) extend beyond a single financial period.
• Money spent for the purchase of land for a new factory:
  • Similar to constructing a house, purchasing land for a factory is a capital expenditure because the land is a long-term asset.
  • The benefits this asset will provide, like a site for factory operations or increases in value over time, extend beyond a single financial period.

The correct answer is Revenue expenditure.

Key Points

Depreciation:

• Depreciation is the systematic reduction of a fixed asset's recorded cost until the asset's value equals zero.
• Depreciation enables a portion of the cost of a fixed asset to be applied to the income the fixed asset generates, whether significant or small.
• According to the matching principle, this is required since revenues and associated expenses are recorded in the accounting period during which the asset is in use.
• Depreciation of fixed assets is an example of a revenue expenditure transaction. 
• When a cost is incurred, it is immediately applied to an expense as a revenue expenditure.

Important PointsRevenue Expenditure :

• Short-term expenses used in the present time or often within a year are referred to as revenue expenditures.
• Revenue expenditures are essentially the same as operating expenses because they cover the costs associated with maintaining a business.

There are two types of Revenue Expenditures which are as follows:

• Maintaining a Revenue Generating Assets: Repair and maintenance costs are included in the maintenance of a revenue-generating asset since they are incurred to maintain ongoing operations rather than to improve or extend the life of the asset.
• Generating Revenue: All ongoing costs connected with running a business, such as rent, office supplies, and utilities, are included in expenses related to revenue generating. Because they are directly related to the time period in which they were incurred, these expenses are also known as period expenses.

Key PointsIncome and expenditure account

• The business entity creates the income and expenditure account to assess whether there is an excess or a deficit of income over expenditures for a specific period of time.
• While creating the income and expense accounts of non-trading companies, the cumulative or accrual concept of accounting is strictly adhered to.
• It is prepared as a component of non-trading entities' final accounts and is equivalent to the profit and loss account presented by for-profit corporations.

Important Points

Features of Income and Expenditure Account

• It is created by closely adhering to the principles of the double-entry system of accounting or bookkeeping.
• It is always ready at the end of the time frame, which is often a year.
• It determines the non-trading businesses' income over expenses surplus or deficit for the given year.
• The income and expenditure account's excess or deficit is transferred to the capital fund account.
• This account includes the income and expense accounts that are only of a revenue nature. Capital-related revenue and expenses are not taken into account.
• It is a revenue account prepared at the end of the accounting period for finding out the surplus or deficit of that period.
• The revenue account is prepared to find out the profit or loss for a particular period.
• All kinds of expenditures whether cash or non-cash are considered in the revenue account.

Hence, Statement 3 is incorrect.

The current answer is Overlook expected rate of return on each project.

Key PointsCapital budgeting-

• Capital budgeting is a process of planning expenditure in those assets or projects whose return is expected to extend beyond one year.

Important PointsObjectives of Capital budgeting-

• Determining efficiency of the project or asset by estimating rate of return.
• Maximizing of profit through selecting profitable projects
• Maximizing wealth by minimizing cost and maximizing return.

The correct answer is Capital Expenditure

Key Points Capital Expenditure:

• Capital Expenditure refers to that expenditure which is incurred for acquiring fixed assets or assets which increase the earning capacity of the business.
• The benefits of capital expenditure extend to the number of years.
• Examples: Expenditure incurred for acquiring a fixed asset such as building, plant, and machinery, etc.

Additional Information

Deferred revenue expenditure: It refers to those expenses which are incurred during one accounting year, but benefits from the same are available wholly or in part in future periods also. Example: heavy expenditure on an advertisement, expenditure incurred on research and development, etc.

The correct answer is - Profit and Loss Account and Balance Sheet

Key Points

• Deferred Revenue Expenditure
  • Deferred revenue expenditure refers to expenses that are initially recorded as an asset but are expected to be charged to the profit and loss account over more than one accounting period.
  • This type of expenditure is typically significant in amount and is expected to benefit the business for several years.
  • Examples include heavy advertising costs or extensive research and development expenses.
• Profit and Loss Account
  • The Profit and Loss Account is used to record the income and expenditure of a business for a specific period, usually a year.
  • It helps in determining the net profit or loss of a business.
  • Deferred revenue expenditure is gradually written off to the Profit and Loss Account over the period during which it is expected to benefit the business.
• Balance Sheet
  • The Balance Sheet provides a snapshot of a company's financial position at a specific point in time.
  • It lists the company's assets, liabilities, and equity.
  • Deferred revenue expenditure appears as an asset on the Balance Sheet until it is fully amortized and written off to the Profit and Loss Account.

Additional Information

• Trading Account
  • The Trading Account is used to calculate the gross profit or loss of a business.
  • It includes the cost of goods sold and sales revenue.
  • Deferred revenue expenditure does not appear in the Trading Account.
• Manufacturing Account
  • The Manufacturing Account is prepared by manufacturing companies to calculate the cost of production.
  • It includes raw material costs, labor costs, and overheads.
  • Deferred revenue expenditure is not relevant to the Manufacturing Account.

The correct answer is Wages paid for construction of building.

Key PointsCapital Expenditure:

• An expenditure in a company's long-term assets is called a capital expenditure.
• A capital expenditure increases a company's asset value in accounting terms, which has an impact on the company's ongoing revenues and costs.

Important Points

• Wages are typically considered revenue expenses, however wages paid to employees engaged in the construction or installation of the fixed assets of the business are capital expenditures.
• For example, if a building is to be extended, the extension will be completed by company employees. The wages paid in this situation for this purpose would be capitalised.

Hence, it can be concluded that the correct answer is option 3.