What principle governs the recognition of expenses in the Profit & Loss Account?

The matching principle governs the recognition of expenses, indicating when and how much of the expenses should be charged against revenue.

True or False: All expenses incurred for routine maintenance are classified as capital expenditures. Explain your answer.

False

Routine maintenance is not capital expenditure.

• Repairs do not enhance value.

• These costs are revenue expenditures.

• They maintain, not improve assets.

Riddle: I help keep your business running but only for a short while. I’m recorded each year, but don’t stay on the balance sheet. What am I?

Identify whether the following is capital or revenue expenditure: Costs incurred to obtain a license for operating a factory.

How does the materiality of an expense impact its classification as capital or revenue?

Materiality affects expense classification.

• Significant expenses may capitalize.

• Minor costs typically classified as revenue.

• Materiality guides financial reporting decisions.

What is the difference between capital receipts and revenue receipts?

Capital receipts differ from revenue receipts.

• Capital receipts involve long-term assets.

• Revenue receipts are from operations.

• Profit and Loss Account treatment varies.

True or False: The cost of replacing worn-out parts of machinery is a capital expenditure. Provide reasoning.

False. The cost of replacing worn-out parts is considered a revenue expenditure as it is part of routine maintenance.

What are prepaid expenses, and how are they recorded in accounting?

Prepaid expenses are future expenses paid in advance, recorded as assets on the balance sheet until the expense is realized.

Identify whether the following is capital or revenue expenditure: Legal fees incurred to acquire property.

How do improvements to fixed assets affect their classification as capital or revenue expenditures?

Improvements affect asset classification.

• Capital expenditures enhance future benefits.

• Revenue expenditures maintain current value.

• Proper classification impacts financial reporting.

True or False: The amount spent on temporary huts necessary for a construction project is classified as revenue expenditure.

False. The cost of temporary huts is a capital expenditure as they are part of the construction costs.

What is the impact of legal expenses incurred for defending a lawsuit on financial statements?

Legal expenses impact financial statements.

• They are revenue expenditures.

• Affect Profit & Loss Account.

• No asset value enhancement.