Benefits Of Capital And Revenue Expenditure

1307 Words Mar 18th, 2016 6 Pages
Case 9-6 a. Relative to plant assets, a cost incurred or an expenditure made, that is assumed to benefit only the current accounting period is called a revenue expenditure and is charged to expense in the period believed to benefit. A capital expenditure is similarly a cost incurred or an expenditure made but is expected to yield benefits either in all future accounting periods (acquisition of land) or in a limited number of accounting periods. Capital expenditures (if material in amount) are capitalized, that is, recorded as assets, and, if related to assets of limited life, amortized over the periods believed to benefit. The distinction between capital and revenue expenditures is of significance because it involves the timing of the recognition of expense and, consequently, the determination of periodic earnings. It also affects the amounts reported as assets whose costs generally have to be recouped from future periods ' revenues. If a revenue expenditure is improperly capitalized, current earnings are overstated, assets are overstated, and future earnings are understated for all the periods to which the improperly capitalized cost is amortized. If the cost is not amortized, future earnings will not be affected but assets and retained earnings will continue to be overstated for as long as the cost remains on the books. If a nonamortizable capital expenditure is improperly expensed, current earnings are understated and assets and retained earnings are…
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