Download Important Class 11 DK Goel Solutions for Chapter 20 - Capital and Revenue Free PDF
FAQs on DK Goel Class 11 Accountancy Solutions: Chapter 20 Overview
1. What is the step-by-step method to solve practical problems on Capital and Revenue from DK Goel Class 11, Chapter 20?
To solve practical problems from DK Goel's Chapter 20, follow this step-by-step method:
Analyse the Transaction: Carefully read the nature of each expenditure or receipt.
Determine the Purpose: Ask if the expense was incurred to acquire/upgrade a fixed asset (Capital) or to run the daily business operations (Revenue).
Assess the Benefit Period: If the benefit of an expense lasts for more than one accounting year, it is typically a Capital Expenditure. If the benefit is consumed within the year, it is a Revenue Expenditure.
Check for Special Cases: Identify items like repairs. Heavy repairs that increase an asset's efficiency are capitalised, while routine maintenance is a revenue expense.
Classify the Item: Based on the analysis, definitively label the item as Capital Expenditure, Revenue Expenditure, Capital Receipt, or Revenue Receipt.
2. How do you correctly identify a Capital Expenditure when solving questions from Chapter 20?
In the context of DK Goel solutions, an expenditure is correctly identified as a Capital Expenditure if it meets any of the following criteria:
It is incurred for the acquisition of a fixed asset, such as the purchase of machinery, buildings, or furniture.
It leads to an increase in the earning capacity or efficiency of an existing asset, like an upgrade to a machine that boosts its output.
It is incurred to bring a new or second-hand asset to a usable condition, for example, the installation charges or freight paid on a newly purchased machine.
The benefit from the expenditure extends over a long period (more than one accounting year).
3. What is the correct method to classify a Revenue Expenditure as per the CBSE 2025-26 syllabus?
The correct method to classify a Revenue Expenditure involves identifying expenses incurred for the day-to-day conduct of business. An expense is treated as revenue if:
It is used for the purpose of maintaining the existing earning capacity of assets, such as routine repairs and maintenance.
The benefit derived from the expense is consumed within the current accounting period.
It is related to the normal operations of the business, such as salaries, rent, advertising, and the cost of goods sold.
These expenditures are charged to the Trading and Profit & Loss Account.
4. Under what specific conditions is a revenue-type expense treated as Capital Expenditure in the solutions?
Certain expenses, though typically revenue in nature, must be treated as Capital Expenditure under specific conditions. The correct accounting treatment is to capitalise them when:
Wages: Paid for the erection or installation of a new plant and machinery.
Repairs: Heavy expenditure on a second-hand asset to make it operational for the first time.
Transport Charges: Incurred to bring a newly purchased fixed asset to the factory or place of installation.
Legal Fees: Paid in connection with the purchase of land or a building.
Raw Materials and Stores: Consumed in the construction of a fixed asset.
5. Why is the correct classification of an item as Capital or Revenue so critical for preparing accurate Financial Statements?
The distinction is critical because it directly impacts the calculation of profit and the presentation of the firm's financial position. An incorrect classification leads to:
Incorrect Profit/Loss: If a capital expenditure (e.g., buying a machine) is wrongly treated as a revenue expense, it will be fully charged to the Profit & Loss Account. This will understate the profit for the year.
Incorrect Balance Sheet: If the same expense is wrongly debited to P&L, the asset (machine) will not be shown in the Balance Sheet. This presents an untrue and unfair view of the company's assets and financial health.
Therefore, proper classification as per the CBSE 2025-26 syllabus ensures adherence to the matching principle and provides a true and fair view of the business.
6. What is the correct accounting treatment for 'Deferred Revenue Expenditure' and how does it differ from a standard Capital Expenditure?
Deferred Revenue Expenditure is a large revenue expense whose benefit is expected to last for more than one year (e.g., heavy preliminary or advertising expenses). The accounting treatment is as follows:
Treatment: A portion of the expense is charged to the Profit & Loss Account each year, and the unwritten-off portion is shown on the asset side of the Balance Sheet.
Key Difference: A Capital Expenditure results in the acquisition of a tangible or intangible asset that has a resale value (e.g., machinery). In contrast, a Deferred Revenue Expenditure does not create a physical or saleable asset; it's a large expense being written off over time. Capital assets are depreciated, while deferred revenue expenses are amortised or written off.
7. How would you justify treating a heavy advertisement expense for launching a new product as a Deferred Revenue Expenditure in a solution?
The justification for treating heavy launch advertising as a Deferred Revenue Expenditure is based on the matching principle of accounting. The argument is as follows:
The benefit from this large, one-time advertising campaign is not consumed entirely in the year it is incurred. It is expected to generate sales and brand recognition for several future years.
To accurately calculate profit, the cost of this campaign should be matched against the revenue it helps generate over its effective life (e.g., 3-5 years).
Therefore, charging the entire amount in one year would unfairly reduce the current year's profit. The correct method is to write off the expense systematically over the period it is expected to provide benefits.
