Answer to Question #113418 in Accounting for samar

Question

Differentiate between revenue recognition and prudence?
Explain difference between revenue expenditure and capital expenditure with suitable example?

Answer 1

There are two methods of revenue recognition: cash and accrual.

According to accrual concept, expenses incurred and revenue earned during the accounting period should be recorded in the same period of accounts regardless of the actual receipt of payment of cash. 

According to prudence concept revenue should be recognized only when it has been realized. Revenue is recognized in the period in which it is earned irrespective of the fact whether it is received or not during that period.

Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense. Thus, the differences between these two types of expenditures are as follows:

Timing. Capital expenditures are charged to expense gradually via depreciation, and over a long period of time. Revenue expenditures are charged to expense in the current period, or shortly thereafter.

Consumption. A capital expenditure is assumed to be consumed over the useful life of the related fixed asset. A revenue expenditure is assumed to be consumed within a very short period of time.

Size. A more questionable difference is that capital expenditures tend to involve larger monetary amounts than revenue expenditures. This is because an expenditure is only classified as a capital expenditure if it exceeds a certain threshold value; if not, it is automatically designated as a revenue expenditure. However, certain quite large expenditures can still be classified as revenue expenditures, as long they are directly associated with revenue transactions or are period costs.