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CA Foundation · Accounting · Theoretical Framework

Kulkarni Ltd. incurred ₹6,00,000 on a major advertising campaign for launching a new product. The benefit is expected to last about 3 years, but the firm treated the entire amount as an asset. Under the usual Foundation-level treatment of advertisement expenditure, what is the position?

The ₹6,00,000 should be charged as a revenue expense in the year incurred. Advertising, even with benefits over several years, creates no tangible asset controlled by the firm, so it cannot be capitalised under the usual Foundation-level treatment.

  1. ACorrect, since benefit extends over several years it must be capitalised
  2. BTreat as a revenue expense charged in the year incurred, since it creates no tangible assetCorrect
  3. CCapitalise 50% and expense the rest
  4. DTreat as a drawing of the owner

Explanation

Advertisement expenditure does not create a recognisable asset owned by the firm, so even if benefits extend over years it is charged to profit and loss as incurred. Capitalising it because of long-term benefit is the mistake in the first option. The ₹6,00,000 is therefore a revenue expense.

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