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Ques.2. Mehra & Sons purchased a second hand light motor Vehicle at a cost
of Rs 2 lacs. Additionally, various accessories costing Rs50000 were also
purchased along with the Vehicles which are required to be replaced on a
yearly basis. Mr. Mehra wants to write off the overall outflow in Income
statement Discuss, whether he is correct or not? Discuss the need to
differentiate between the capital and revenue items? How these items are to
be treated in the financials of the company? Give reasons supporting the
same
Answer: Definition of Capital Expenditure
When any company buy any long term asset so amount spent on that asset is called capital
expenditure. The purpose is to enhance the working capacity of any existing capital asset, or to
increase its lifespan to generate future cash flows or to decrease the cost of production. As a huge
amount is spent on it, the expenditure is capitalised, i.e. the amount of expenditure is spread over
the remaining useful life of the asset.
In a nutshell, the expenditure which is done for initiate current, as well as the future economic
benefit, is capital expenditure. It is a long-term investment done by the entity, in the name of assets,
to create financial gain for the years to come.
Ques.3. a. All India Insurance Company received an insurance premium of Rs
50 lacs on an insurance policy whose coverage extends till the mid of the
next accounting year.
b) Outstanding expenses are recorded in the books at the end of an accounting period to show true
numbers of a business. Outstanding expense is a personal account and is shown on the liability side
of a balance sheet.
Expenses are amounts paid for goods or services purchased. According to the accrual concept of
accounting, transactions are recorded in the books of accounts at the time of their occurrence and
not when the actual cash or a cash
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