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: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 a nutshell, a transaction that is capital in nature
deals with long-term items, i.e. assets, liabilities
or owner's equity
In contrast, a transaction that is revenue in nature
deals with short-term items - i.e income
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!
- Michael Celender
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