Forums
Back
Capital vs Revenue Expenditure
Accountancy
Sir, how is the repair cost incase of accident example different from the eg given for change of petrol tank due to rust (replacing 12L tank with 12L)? In the petrol tank case, we considered this logic, if the expense would increase the future economic benefit for multiple accounting period, we would have considered the 12 L petrol tank as capital expense. We had removed the earlier logic of tank capacity going beyond 12 alone would be capital. Why can't we apply the same logic again here? Major repair cost due to accident, has resulted in future benefits getting lost and we are incurring the expense to get the future economic benefit (it can be revenue or cost or convivence). Hence, capital. Video Details ------------- Accounting - CA Foundation (New) Capital And Revenue Expenditures and Receipts #4. Illustrations
Answers (5)
Best Answer
Thread Starter
Vignesh VenkatesanThe example sir provides in Chapter 3 - Capital & Revenue Expenditure & Receipts, lecture 2 - Difference between capital and revenue expenditure - Time stamp 9:30, he starts explaining of a point which was followed earlier but not followed currently by quoting a changing of petrol tank. I'm referring to this specific example sir.
That is a slightly advanced concept - you will understand in CA Inter/Final. If parts of an asset are replaced then the cost of existing part derecognised from books and the cost of new component is recognised as an asset. For e.g in case of an aircraft, seats may be replaced every 3-4 years. Engine would last for 20 years. So when seats are replaced, it would be derecognised from books and new seats are capitalised. The example could be presented slightly differently to ensure better clarity.
Repair costs after an accident are generally treated as revenue expenses because they restore the asset to its prior condition—they do not enhance its value, extend useful life, or increase functionality. If we show an asset at say Rs. 1,00,000 in balance sheet. What it means is that we will atleast get future economic benefits of Rs. 1,00,000. 1. If the bike meets with an accident the asset value reduces - technically a loss which we would charge to PL. 2. Then we carry out significant repair to it. By doing that we are just restoring it back to original condition. So if we capitalise repair cost, we would also need to book loss on asset. And since the benefit is not extending beyond the original assessed benefits, we do not capitalise. As per AS 10/Ind AS 16, one key criteria to capitalise cost is future economic benefits.
Thanks sir, at this level, i would understand it as - Any expense incurred relating to an existing asset which doesn't enhance value, extend useful life or increase functionality and is done to restore it to its prior condition is to treated as a revenue expense. But, if this is held true, then in the replacement of petrol tank example, cost incurred in replacing the old petrol tank with a new one of same size (12 Lts) is an expense and this expense is being done on an existing asset, but this doesn't enhance value (as old and new tank capacity are same), nor extend useful life nor increase functionality. This replacement restores asset to its prior condition only. Then in this case, the earlier treatment of treating until 12lts as revenue expense holds good. Then why has this logic been replaced with considering it as capital expense is allowed and what is the rational behind it?
The example sir provides in Chapter 3 - Capital & Revenue Expenditure & Receipts, lecture 2 - Difference between capital and revenue expenditure - Time stamp 9:30, he starts explaining of a point which was followed earlier but not followed currently by quoting a changing of petrol tank. I'm referring to this specific example sir.
Your Reply