12 July 2017
In an Accountancy Book by T.S. Grewal, in the chapter of Journal, there is a question: "Insurance premium amounting to ₹50,000 was paid by cheque for all the machines. Out of the premium, ₹5,000 was towards insurance of new machinery." The solution given is: Insurance Premium A/c Dr. 45,000 Machinery A/c Dr. 5,000 To Bank A/c 50,000 Since the premium of ₹5,000 is for the new machinery, it is debited to the Machinery A/c.
So, this means it is capitalized, right!?
Now, in the same book, in the chapter of Final Accounts, there is a question asking us to differentiate certain items of expenditure on the basis of Capital & Revenue. The questions are:
1. Second-hand car was purchased for a sum of ₹50,000. A sum of ₹10,000 was spent on its overhauling. Answer (given in the book): Both the expenditures are capital expenditures. (I don't have any issues in this). 2. Cost of annual taxes paid and the annual insurance premium paid on the car mentioned above. Answer (given in the book): This is a Revenue Expenditure!
12 July 2017
Yes, it does sound conflicting. See the line between capital and revenue is at times very very thin. It also depends upon the associated conditions. In the book, unfortunately these associated conditions, although should be, but not clearly spelt out. That might create a contradiction. Let me try to put the logic/rationale behind this. The second hand car, although a fresh purchase for the buyer, has been a car on which taxes required to be paid. (In olden days it was yearly payment of tax...NOW we have 15 years discounted value to be paid as RTO tax). So? Unless taxes are paid, the vehicle can NOT be regarded to be roadworthy.....it is "MUST" kind of payment. without which the transfer can NOT be effected..... So? The annual taxes and insurance paid subsequent to buying of the second hand car is revenue expenditure.
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