Insurance nature regarding in books
This query is : Resolved
12 December 2010
whether insurance is a capital nature or revenue why
12 December 2010
Capital Expenditure
Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods. It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset. These are not meant for sale. Expenditure incurred for improving assets and extending an existing asset is also capital expenditure.
The sum of invoice price, freight and insurance charges, installation and erection cost and custom duty etc. will be capitalized in the books of a firm. These capital items appear on the assets side of Balance Sheet.
Examples:
(a) Interest on capital paid during the period of construction of Company (u/s 208 of Indian Companies Act)
(b) Expenditure in connection with or incidental to the purchase or installation of an asset.
(c) Acquisition of new assets.
(d) Expenditure incurred for putting the old asset purchased, into working condition.
(e) Additions and extensions to existing assets.
(f) Interest and financing charges paid, brokerage and commission paid.
(g) Betterment of fixed assets or improvement of an asset to produce more, to improve its earning capacity or to reduce its operating expenses or to increase the life of asset.
The cost of assets will be written off by way of depreciation over a period of its life. The amount of depreciation is a revenue expenditure and is debited to profit and loss account. The reason for charging depreciation to revenue i.e. profit and loss account is that the asset is used for earning revenue. Hence the depreciation is charged to profit and loss account. Thus, the benefit of capital expenditure does not exhaust in one year but extends over a number of years of its use or life of the asset.
Revenue Expenditure
Revenue expenditure consists of expenditure incurred in one period of the accounting, the full benefit of which is enjoyed in that period only. This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning capacity of the business. It includes all expenses which arise in normal course of business. The benefit of such expenditure is for a short period, say, one year only and it is not to be carried forward to the next year. The expenditure is of a recurring nature i.e. incurred every year.
Examples:
(a) Purchase of raw materials for conversion into finished goods.
(b) Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, et(%
(c) Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment.
(d) Depreciation of plant, machinery and equipment.
(e) Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such' as repairs to building, repairs to plant, white-washing and painting of building.
All these items appear on the debit side of trading and profit and loss account, in case of trading concerns or income and expenditure account, in case of non-trading concerns.
if you are capitalized insurance at the time of purchase of asset then insurance will be capital expenditure
if you are taking insurance in nest time then treat as revenue expenditure.
Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods. It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset. These are not meant for sale. Expenditure incurred for improving assets and extending an existing asset is also capital expenditure.
The sum of invoice price, freight and insurance charges, installation and erection cost and custom duty etc. will be capitalized in the books of a firm. These capital items appear on the assets side of Balance Sheet.
Examples:
(a) Interest on capital paid during the period of construction of Company (u/s 208 of Indian Companies Act)
(b) Expenditure in connection with or incidental to the purchase or installation of an asset.
(c) Acquisition of new assets.
(d) Expenditure incurred for putting the old asset purchased, into working condition.
(e) Additions and extensions to existing assets.
(f) Interest and financing charges paid, brokerage and commission paid.
(g) Betterment of fixed assets or improvement of an asset to produce more, to improve its earning capacity or to reduce its operating expenses or to increase the life of asset.
The cost of assets will be written off by way of depreciation over a period of its life. The amount of depreciation is a revenue expenditure and is debited to profit and loss account. The reason for charging depreciation to revenue i.e. profit and loss account is that the asset is used for earning revenue. Hence the depreciation is charged to profit and loss account. Thus, the benefit of capital expenditure does not exhaust in one year but extends over a number of years of its use or life of the asset.
Revenue Expenditure
Revenue expenditure consists of expenditure incurred in one period of the accounting, the full benefit of which is enjoyed in that period only. This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning capacity of the business. It includes all expenses which arise in normal course of business. The benefit of such expenditure is for a short period, say, one year only and it is not to be carried forward to the next year. The expenditure is of a recurring nature i.e. incurred every year.
Examples:
(a) Purchase of raw materials for conversion into finished goods.
(b) Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, et(%
(c) Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment.
(d) Depreciation of plant, machinery and equipment.
(e) Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such' as repairs to building, repairs to plant, white-washing and painting of building.
All these items appear on the debit side of trading and profit and loss account, in case of trading concerns or income and expenditure account, in case of non-trading concerns.
if you are capitalized insurance at the time of purchase of asset then insurance will be capital expenditure
if you are taking insurance in nest time then treat as revenue expenditure.
12 December 2010
Agree with Ram Avtar Singh Sir
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