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CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions

Which of the following is the best description of revenue expenditure?

Revenue expenditure is spending incurred to maintain the business's earning capacity and day-to-day operations, with its benefit mostly consumed in the current accounting period. It is charged against profit for the year. Spending that creates a long-lasting asset is capital expenditure instead.

  1. AExpenditure that adds a permanent asset which benefits the business for several years
  2. BExpenditure incurred to maintain the earning capacity of the business, with benefit mainly within the current accounting periodCorrect
  3. CExpenditure incurred to repay a long-term loan
  4. DExpenditure incurred to increase the owner's capital in the business

Explanation

Revenue expenditure is incurred to run the business and keep existing assets in working order, so its benefit is exhausted mainly within the year. It is charged to the Profit and Loss Account. Expenditure that creates a lasting asset is capital in nature, which is what the first option describes.

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