What are basic rules for making difference between capital and revenue expenditure

What are basic rules for making difference between capital and revenue expenditure

Ist Rule

All expenses which are done for getting any fixed asset must be capital expenditure. For example, expenses of carriage and freight for getting fixed assets are also capital expenditure and will include in the total cost of fixed assets.

2nd Rule

All expenses which are done for increasing the size or improvement in fixed assets must be capital expenditure.

3rd Rule

All expenses which are done for getting share capital or long term loan must be capital expenditure.

4th Rule

Look also nature of business , if business is relating to general goods sale -purchase transaction then above three rules will applicable but , if nature of business shows dealing in above transaction , then above transaction becomes revenue expenditure .

5th Rule

Legal judgments is also so important for taking decision , Like Income tax law 1961 has provided some rule regarding assessment of business and profession . These rules also give good guidance for making difference between revenue and capital expenditures.

What is deferred revenue expenditure?
As a matter of fact , deferred revenue expenditure is capital expenditure . Because , it has both quality of revenue
and capital items, so it is deemed as deferred revenue expenditure.
Example:
Heavy advertisement expenses , because this is for promotion of sale so, it is revenue expenses but because amount is too large so it is also capital expenditure. Now, it will include in deferred revenue expenditure. If we fix the target of getting benefit for this advertisement is 10 years and advertising cost $ 500000. Now $ 500000 is divided by 10 years and we get $ 50000 and it will show as revenue expenses in profit and loss account and balance amount of $ 450000 will show in balance sheet. Every year one tenth part of Original and total advertising expenses will go to profit and loss account. This deferred revenue account will close in 10th year when there will not be any balance for showing as asset in balance sheet .

There are also other deferred revenue expenditures like underwriting commission, discount on issue of shares and debentures , brokerage paid on purchase of shares and debentures, research expenses and development expenses

Definition of Drawing

We use drawing many times in financial accounting .Drawing here means any amount withdraw from business for personal use. Not only cash but if we withdraw any product from business or any asset of business for personal use that will be drawing.
It surely reduces the capital of any business. So business man must record drawing in his books so that accountant can calculate correct profit or loss of business man .Some accounting terms, Intangible assets
This is the asset which is not visible but we can feel them . The main examples of these assets are goodwill, patent, trade marks

Factitious Assets
If any asset which has no any market price that asset is called factitious assets .This is showed as expenses of capital expenditure . The main example of these factitious assets are Preliminary expenses , discount on issue of shares and debenture
calculations
1. cost of goods sold =opening stock + purchase +direct expenses - closing stock
2. Gross profit = sale price - cost of goods sold
3. Net profit = Gross profit - Indirect expenses
4. Commission on net profit before charging such commission
= Net profit before charging X Rate/100+Rate

Definition of Goodwill
Goodwill is an intangible asset which makes any organisation with his good name , by selling quality product , by selling product at less price .Goodwill can be earned by speaking sweat words to customer . An expert can tell about the correct value of Goodwill
but in general IT is the excess of super profit over general profit .or If any concern is gaining more profit than his general rate of return then it means it is generating Goodwill .Goodwill can not generate with in night but for generating goodwill any firm can take 10 to 20 years . Which is called long period is suitable for generating goodwill .
If you are selling your old firm you can also demand the value of goodwill with total cost of your asset . If you think that Firm or company name is sale-able in market .
Personal accounting means recording of domestic expenses and income . It is very necessary that to record your income and expenses. Because without recording your personal accounting , you can not make your domestic budget. If you are living in any noble family , it is you duty to complete your all expenses with your limited income , so make estimation of all monthly expenses . This estimation can be done if you have recorded early months expenses . So it is your duty to record your personal expenses. Recording of personal income and expenses is very easy . Just keep a Note book in you pocket and after spending any expenses you must record your expenses. After month you will see what is your total expenses and where did you expand it. On this base you can make you family budget. If you can not keep note book then you can record your expenses in excel sheet. In each night you can record full day expenses in different things like juice , ice-cream , wheat , petrol , dresses , fees , charity etc. After month total them you can get you monthly recorded expenses after one year you can your yearly real expenses . It is not necessary that all year we have to do same expenses but we can estimate our yearly expenses.