In this session, we will be learning about what does the expenditure what is a capital expenditure, revenue expenditure and deferred revenue expenditure, what is expenses? What is purchases? What does creditors accounts payable and bills payable? And what does a purchase return? So, let's begin expenditure and teacher means spending money for the purpose of business. When the money spent out any payment is made for the purpose of business it is known as expenditure.

Let us see what are the types of expenditures Faustus capital expenditure capital expenditure incurred for acquiring a fixed asset By extension or improvement in fixed asset or or substantially replacement of existing asset. So, any expenditure which is incurred for acquiring a new fixtures that are for extension or improvement are often existing fixed asset or for a substantial replacement or say the new version of existing asset and it is known as a capital expenditure. The benefit of expenditure is more than a year this is important. Now, let's see example of capital expenditure. So, this is a business you're in the business of producing chocolates. So, there is an existing machinery which produces 10,000 units Chocolate already.

So, what has happened is there is one capacity enhanced device which is purchased okay. And because of which what has happened is the production capacity of machine has increased to 15,000 units per day. So, what has happened is because of this capacity enhancer device, your machine of producing chocolates has improved the capacity of producing chocolate has increased. So, there is an improvement in the existing machinery. So, this is your as an example of gap expenditure okay Now, let's see one more example. This is a business.

Okay, then this is our office building 50 years old. Okay, so there is a complete renovation of the office building, renovation and repairs complete renovation of this office building. So what does it include? It includes replacement of your electrical fittings, replacement of your plumbing pipes painting, replacement of old doors with the glass doors. So now what has happened is because of this renovation the life of asset has increased okay. So there is an improvement or enhancement in this old office building.

Therefore this renovation expenditure is capital expenditure and is an addition to your existing asset. Now let's see what does a revenue expenditure revenue expenditure incurred for running day to day activities in the business the benefit of expenditure is not more than a year. So, these are type of expenses which are incurred for running your day to day business activity and the benefit of expenditures not more than a year. So, what are the examples of this extended ample your purchase of goods then your salaries, ages paid is maintenance. Now in this case, this office maintenance or this is a maintenance or repairs expenses which are very small okay. of recurring nature okay whereas the example which we saw earlier for capital expenditure, the renovation and repairs expenses was huge and it caused an extension and improvement substantial extension and improvement in the existing assets.

That is why it was a capital expenditure. Whereas here the office maintenance or repairs are day to day maintenance or repairs which are required for keeping a particular fixed asset in our running condition okay. So, this is this is a revenue expenditure, then you also have rent Okay. Then there may be some electricity expenses, water all these are examples of revenue expenditure. deferred revenue expenditure This is good tricky, okay. Now when you see default revenue expenditure, defer means to postpone.

So, default revenue expenditure is in the revenue expenditure, which is incurred by the benefit of expenditure is more than a year. So, the nature of expenditure is similar to your revenue expenditure. So, assets there is no addition to any fixed asset or extension or improvement in the fixed asset or substantial replacement of an existing asset, as was in the case of capital expenditure. So, your nature of expense will be like your revenue expenditure, but the benefit of that expenditure will extend more than a year. Now, let's see an example for deferred revenue expenditure business and you're launching our new product for this launching of new product we have incurred huge advertising campaign expenditures rupees nine lakhs. Now it is expected that the benefit of this advertising campaign would last for three years.

So steer second year and third year. Now if you see here the expenses huge that is nine lakhs by the nature of expenses in the form of revenue. So, this is an example law that for revenue expenditure there was a huge expense which was incurred in one year, but the benefit of it will be for three years what is required to death for or to postpone the sex spends for three years. So, what will we do is every year this is three years right and the expenses are much nine lakhs nine divided by three that comes to three lakh. So, every year we will be recording an expense of three lakhs the books instead of charging it for one year, we will be charging it for all three years equally right. Now, in the first year this three lakhs will be in your expense recorded as your expense and balance six lakhs.

Then now the six lakhs is what is the amount incurred, but we will be receiving the benefit of it in the second and third year. So it will be recorded as asset then at the end of second year out of the six lakhs three lakhs will be recorded as an expense and balance three lakhs will be as asset okay that this deferred revenue asset then in third year this three lakhs will be recorded as expense and then balance in the deferred revenue asset will be zero. So, this was about your deferred revenue expenditure okay. So, this was all about the expenditure. There are basically three types of expenditure, one is capital expenditure, one is revenue expenditure and third one is deferred revenue expenditure expenses cost incurred by the business for process of earning revenue is expense. The expenses are calculated by cost of asset used during a particular period or services consumed during a particular period.

So, basically costs incurred by the business for the process of earning revenue on a day to day basis on a recurring basis are known as expenses. Now, these are the exam bursts of expenses, depreciation on fixed asset, rent, salaries and wages, telephone and mobile with electricity charges, water charges, etc. As seen what is the revenue expenditure We're seeing what this expenses so, revenue expenditures when you pay for your expenses and expenses are when they are incurred and expenses may also be the non cash form. For example, if you see here depreciation on fixed asset a depreciation on fixed asset is the month cash expense, if so, what is depreciation is every year okay there is some wear and tear of your fixed asset a some percentage of that fixed asset is written off and treated as an expense that is known as depreciation. So, as such, we're not making Any payment for depreciation every year okay?

So it won't come under your revenue expenditure, but we are charging it as an expense and reducing it from our balance of fixed asset. So your depreciation on fixed asset isn't on cash more more expenses, this is a difference between a revenue expenditure and expenses okay. So, this was about expenses, purchase purchases are total amount of goods that are procured for the purpose of business. So, whatever goods are procured for the purpose of business are known as purchases. Now, let's see one example. This is a business, okay?

The business or manufacturing Water Purifier. So, they need to purchase filters and they need to purchase pipes then they need to purchase some small parts then candy of cylinder process are an assemble and then it is sold as a one product that is water purifier okay. So all these are purchases okay and this purchase goods are procured for purpose of business so this or chase off no materials now see we have a business of trading person is trading in what you read. So what he does is he purchases some water purifier And he packs it and he sells it in the market. So basically doesn't produce or assemble anything, you just purchase a water purifier and densive system the market. So this is purchase all finished goods.

So as such there is no process on this, you just purchase it and sell it. Now we'll take one more example. Say you have a business and you are a service provider. Okay. You provide services for maintenance of water purifier and you will maintain and so you refresh. So for that purpose, sometimes you need to replace the filters pipes so you purchase filters on pipes.

Small parts and you don't sell it as it is what you do is during your emcee day or whenever you have to provide the service, you replace it, replace it by providing service. Again here you are a service provider. So, this is your purchases. You don't manufacture anything, but you use it for replacing or repairing your purifiers. Okay, so these are the examples of purchase of goods. Now, we'll see what are the two types of purchases.

So purchases of two types on this on gash in case of cash purchases, this paid immediate case of credit purchases, this purchase Now, but be late. So let's take an example though our previous example save your manufacturer Have you read via water purifier, now we've got chase pipes from Mr. E and we are paying to him one month now in this case this is an example of credit purchases. We have purchased from Mr. E but we are paying to him after one month. That is you're purchasing from Mr. E on credit basis. So this is an example of credit purchase. Okay, see, we are purchasing filters from Mr. B and we are making payment immediately.

Okay, so in this case since we are making payment immediately, this is an example of cash for cheese. Okay, now here, Mr. A, is that correct it also known as accounts payable, we are obliged to pay Mr. E after one month for the pies purchased. Okay, so Mr. E is our liability. And since it's a short term namely de gay, we will be recording it that's under current liabilities. Okay, the balance sheet so, we'll be recording human current liabilities in the balance sheet, Mr is a creditor or accounts payable. Now let's take it further.

See, this is Mr. v and this is our business. So now mister is a creditor okay we will be paying Mr a after one month so now Mr a draws a bill okay are not business and we accept the bill except sign and send it back to Mr. e. Okay. Now what does that bill have the bill has contain that our businesses purchase so and so materials from Mr. A and is obliged to pay so and so amount on so and so date and it is accepted and signed by us. Now this is known as Vince PayPal. for us and for Mr. Ears as Namaste bills receivable okay.

So this bill is known as a bill or exchange Okay. Now, what will happen is this Mr he can use this bill receivable which is signed by us, okay. And he can avail a loan from the bank against this bills receivable it now on the due date we need to pay the amount which is mentioned in this bill to mystery. Okay, so this was about bills payable and this receivable now in the books of our business, what will happen is Mr. A was a creditor. Now, instead of creditor the amount due to Mr. E will be recorded in this paper and that This paper is also a shot likely instead of creditor will be recording among people, Mr. E and double speed cases we have signed the bill of exchange with the story. So, this was about bills of exchange is PayPal bills receivable purchase returns, if the goods purchased down to the vendor it is known as purchase returns, it will be reduced from total purchases.

It will also impact cash bank balance of creditors balance as per the terms with the vendor. Let's see an example. This is the same example. Okay. Now, in this case, say we have purchased pipes and there was some defect in the pipe so we returned it to Mr. Eight Okay.

So, what has happened is the pipes have been returned okay to Mr a and we have recorded the purchases So, there was already increase in the stock. So our stock has decreased okay. So we have to reduce our purchases also since the purchase was on credit basis we have to reduce Mr his balance that his credit balance will reduce our liability also since we have written the goods there is no amount which is payable able to him after the one month for the goods Okay. Now in this case say we have purchased the filters and we have returned the filters to Mr B. Now, in this case it was a cash purchase Okay. One there will be a reduction in stops reduction in purchases.

Now, this was a cash purchase. So, he he may return back or cash okay. So there will be increase in our cash balance or if he is a regular customer he may adjust it with our previous or future purchases okay. So accordingly we have to add just balance so this was about purchase written