Basic Accounting Quiz: Capital Expenditure vs Revenue in Nature
by Muhammad Sajjad
Before you begin:For purposes of testing and exams it's important to make sure you not only answer correctly but do so at the right speed. Use a watch or clock to time yourself while attempting this quiz.
Difficulty Rating: Beginner
Time limit: 8 minutes
Q: State with reasons whether the following expenditure items are capital or revenue in nature:
Purchase of Land.
Installation of Plant and Machinery
Expenditure incurred during the erection of Machinery.
Commission paid to a worker.
Repair of truck met with an accident.
Repair charges of furniture.
Paid wages to factory workers.
Paid advertisement expense.
This is a great basic accounting quiz on capital vs revenue in nature items.
Before scrolling down to the solutions below, take out a pen and piece of paper and give these questions a shot. Then compare your answers to the ones below...
Now, let's first make sure we understand what we mean by capital versus revenue in nature for expenditure.
In contrast, a transaction that is revenue in nature deals with short-term items - i.e income and expenses.
In particular, capital expenditure is spending on things that provide long-term benefits. In other words, non-current or fixed assets (meaning long-term assets).
Revenue-in-nature expenditure is spending on things that provide immediate or short-term benefits. In other words, expenses and current assets.
Here are the answers:
Capital expenditure. Land is a fixed / non-current asset (meaning asset held for the long-term).
Capital expenditure. installation costs form part of an asset's cost. Since assets are long-term, so are installation costs.
Same as b). Erection costs form part of the cost of the machinery (or other asset).
Revenue in nature. Commission and other employee costs (salaries and wages) are expenses.
Revenue in nature. Repairs and maintenance are expenses. (In contrast, improvements are capital as they result in an asset with higher value. Repairs and maintenance maintain an asset's value - they do not improve it - so these are counted as expenses.)
Same as e)
Same as d) - just like commissions and salaries paid.
Revenue in nature. Advertising is an expense.
Hope you enjoyed this basic accounting quiz about capital vs revenue expenditure items!