Question: 

What are the two types of Expenditure?

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BeingSkilled's picture

  • There are two types of Expenditures:

1. Capital Expenditure

 

  1. It can be used for long term and its effect is reduced gradually over years. It doesn’t occur over and over. A part of this expenditure is entered in the trading and P&L account or the Income and expenditure account as depreciation.

  2. It is shown in balance sheet till it is fully exhausted.

  3. It won’t reduce the revenue.

2. Revenue Expenditure

  1. It can be used for short period i.e. it is temporary.

  2. It needs to be purchased again and again.

  3. This expenditure helps in operations.

  4. Whole amount is shown in trading and P&L account

  5. It reduces revenue. Payments of salaries to employees decreases revenue.

  1. This is a cost which is included in the accounting year when it happened.

  2. In any factory plant when repairs are done or any maintenance work is done so these

    costs are added to the Repairs and Maintenance Expense.

CASE OF THE QUESTION –

  1. Mr. Ramchandani purchased a Shaper Jet 3D printer for INR 90,000 and also some printer cartridges and ink for INR 10000

  2. As we know that Printers are machines which stays usable for long time so it is a long term asset. It is a Capital expenditure.

  3. Cartridges and Inks are consumables and are used by the printers. So it is revenue expenditure. It will be charged in the repairs and maintenance expense.

    We will treat the expenditure by preparing the financial statements as below:

    1. Since Capital expenses and revenue expenses are different , we cannot have them in same

      financial statement.

    2. Capital expenses ( Printer ) will be added to the assets side of the balance sheet.

    3. Revenue expenses ( Cartridges ) will be debited to Repairs and Maintenance Expense

      account.

Depreciation

- Whenever the value is decreased of any asset, due to age, usage, it is called Depreciation. We provide this to:

o Calculate true profit and loss
o To adjust for the replacement of assets which will be worn out completely

To calculate the depreciation, we have two methods:
1.
Straight Line method – In this method the depreciation will be fixed for every year at the

rate mentioned of the Asset Purchase Price.
a. In this, in every successive year, we are reducing the 10% of the cost of the capital

expense which is the cost of printer ( i.e. INR 90000 * 10% = INR 9000 )

2. Written down Value Method – Depreciation will be taken at the residual amount at the end of each year after the depreciation done amount.

  1. In this the scrap value is ignored.

  2. In every successive year, 10% of the cost is reduced and added to the expense which

    reduces the profit of that particular year.

Value of Printer

Printer's Value in 2nd year

Printer's Value in 3rd year

Printer's Value in 4th year

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Printer's Value in 5th year

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Printer's Value in 6th year

90000

81000

72000

63000

54000

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45000

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Value of Printer

page4image41840

Printer's Value in 2nd year

page4image43264

Printer's Value in 3rd year

Printer's Value in 4th year

Printer's Value in 5th year

Printer's Value in 6th year

90000

page4image51360

81000

page4image53104

72900

65610

59049

53144.1