Difference Between Capital Expenditure And Revenue Expenditure

In accrual accounting, an expense is recognized when the business is obligated to pay it. As goods or services are invoiced, the invoices are posted and counted as assets. Expenses are also posted at the time they are incurred. Accrual accounting is used at most mid-level and large businesses and provides a more accurate picture of the company’s current condition, it is however more expensive to implement. This type of accounting is required by GAAP. Although this type of accounting is more complex, it allows one to track receivables and payables, and match revenues to expenses, which gives more meaning to financial reports.

The cash basis of accounting records revenues when cash is received and expenses when cash is paid out. The accrual basis of accounting records revenues when they are earned and expenses when resources are used.

A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.

The accrual basis of accounting uses the adjusting process to recognize revenues when earned and expenses when incurred. The cash basis of accounting recognizes revenues when cash is received and records expenses when cash is paid. An example of accrual basis of accounting is if a company is insuring a building. The insurance company bills the company $600 every six months. If each bill is for six months of coverage, then under the accrual method, the company would not record a $600 expense in January and a $600 expense in July. It would instead record a $100 expense each month for the whole year.

An adjusting journal entry or an adjusting entry, involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability) and typically relates to the accounts for accrued expenses, accrued revenue, prepaid expenses and unearned revenue. (Investopedia.com, n.d.) When accounts are not updated to show the correct transactions or a mistake has been made, adjusting entry will provide insight in order to ensure all entries are appropriately recorded. This action will then reflect the accurate amounts of expenses and revenues. Once this is done, a business may close accounts for the ending period.

2. On the basis of the response to Question 1, discuss the revenue recognition accounting literature

| Part I:  Write a 1,400- to 1,750-word paper explaining the following:          Revenue recognition principle          Expense recognition principle Describe the four situations that require adjusting journal entries and provide one example for each:          Prepaid expenses          Unearned revenues          Accrued expenses          Accrued revenues Format the paper consistent with APA guidelines. Part II Complete problem set P4-2A Page 209 in Ch. 4 of Financial Accounting.

Reports revenues and expenses for a specific period of time. A firm's revenues, gains, expenses and losses are listed on the income statement. Revenue is money earned from a company’s

Question 4.4. (TCO 2) How are revenues and expenses defined under accrual accounting? (Points : 5)

According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.

Under GAAP, it is possible to use cash-basis or accrual basis accounting for revenue recognition. Under cash basis, revenue is recognized with payment is received. Under accrual basis, revenue is recognized when it becomes economically significant. GAAP has specific requirements for various industries on when an event qualifies to be recognized as revenue.

The major distinction between the accrual and the cash basis of accounting is when revenue and expenses are recognized. When the cash method is used, revenue is recorded when money is received. Expenses are recorded only when money is paid. The Accrual method accounts for revenue when it is earned. Expenses for goods and services are recorded when they are incurred. The

Accounting transactions are professional occasion that has either a positive or negative budgetary impact on the financial statements. One impact of transactions in a financial statement will increase or decrease the accounts contingent on the transaction that has taken place. The history of revenue that has come or gone from the business will be shown on both financial statements and accounting transactions. Many businesses make several transactions daily. Errors can have a negative impact on financial statements, because the facts come from the accounting transactions

In this literature review I will describe and explain the key differences between capital expenditure and revenue expenditure that have been identified by others that have studied the subject previously.

If a business borrowed $10,000 at 5% on a 6 month short-term loan, the accountant would debit cash for $10,000 and credit notes payable for $10,000. To pay back the amount of the loan and interest at maturity, an accountant would debit notes payable for $10,000, debit interest expense for $250, and credit cash for $10,250. Businesses will sometimes receive money before they provide goods or services, which would create an account called unearned revenue. If a business were to receive $500 for a promised service that has not been provided yet, the accountant would debit cash for $500 and credit unearned service revenue for $500. As soon as the service is provided, the accountant can debit unearned service revenue for $500 and credit service revenue for $500. When businesses sell goods to consumers they have to collect sales tax for everything that is sold. A business incurs a liability when goods are sold until they pay the taxes to the state. If a business receives cash sales of $20,000 and collects an additional 5% for sales tax, an accountant would debit cash for $21,000, credit sales revenue for $20,000, and credit sales tax payable for $1,000. The accountant would debit sales tax payable for $1,000 and credit cash for $1,000 to pay the sales tax to the state. Businesses will incur expenses and pay them at a later date, which is referred to as accrued expenses. A business