Capital and Revenue Expenditure and Accounting for Intangibles Work Example

Published: 2021-06-21 23:49:16
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Category: Finance, Business, Investment, Taxes

Type of paper: Essay

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Capital expenditure is that expense that is incurred by organization to purchase or upgrade the current tangible assets like machinery, building and equipments. Whereas revenue expenditure is such kind of expenses that is related to the cost of doing daily business transactions. It is important to distinguish between capital expenditure and revenue expenditure because we include only capital expenditure in the cost of fixed assets. Following are the differences between capital and revenue expenditures. (Victor, 2010)

The first difference between capital and revenue expenditure is that the nature of Capital expenditure is a non recurring expense while revenue expenditure is recurring in nature. The main purpose of capital expenditure is purchasing new capital assets or increasing the capacity of existing assets while the main purpose of revenue expenditure is to manage the daily activities of the business. An organization can take benefit of capital expenditure for a number of years. On the other hand, the benefit of revenue expenditure is not more than one year. Write the capital expenditure in the statement of financial position until its benefit is completely exhausted. On the other hand, we do not write revenue expenditure in the statement of financial position. Capital expenditure does not affect the revenue of business i.e. buying fixed asset does not decrease the revenue of the business. Revenue expenditure decreases the revenue of the business. Capital expenditure helps in improving the position of business while revenue expenditure helps in maintaining the position of the business. (Victor, 2010)

Intangible assets are those assets that do not have any physical presence e.g. patents, goodwill and copyright. Intangible assets are also shown on the balance sheet of the company and it is very challenging for accountants to present a true and fair picture of intangible assets. The main challenge for accountants is to calculate the value of intangible assets. Usually companies use fair value accounting principle while calculating intangible assets. Not all intangible assets may fall under this principle. Companies should revalue their intangible assets as per their present market value and if the present market value is less than historical value then their actual value must be reported. Other problems faced by accountants while accounting of intangible assets is calculating the liquidation value of such assets. (Thomason)

References

Victor, D. (2010, February 12). Capital expenditure and revenue expenditure. Retrieved from
http://www.insidebusiness360.com/index.php/capital-expenditure-and-revenue-expenditure-2-14342/
Thomason, K. Problems of intangible assets in accounting principles. Retrieved from
http://www.ehow.com/info_8523748_problems-intangible-assets-accounting-principles.html

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