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Chapter 9: Problem 10

Identify two types of revenue expenditures. What is the proper accounting for revenue expenditures?

Short Answer

Expert verified
Types: repair costs and utility expenses. Proper accounting: expensed in the period incurred.

Step by step solution

01

Understanding Revenue Expenditures

Revenue expenditures are costs that are incurred for operating and maintaining a business's day-to-day functions. These expenditures do not result in the acquisition of assets that offer benefits beyond the current accounting year and typically are related to current operations.
02

Identify Two Types of Revenue Expenditures

Common types of revenue expenditures include repair and maintenance costs, and utility expenses. Repair and maintenance costs keep equipment or assets in working condition without substantially increasing their value or extending their useful life. Utility expenses cover costs such as electricity, water, and internet services required for daily operations.
03

Proper Accounting for Revenue Expenditures

Revenue expenditures are reported in the income statement and are deducted from the revenue in the period they are incurred. This signifies that these costs are expensed in the same period they occur, reducing the period's net income but not affecting the company's asset balances on the balance sheet.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Income Statement
The income statement, also known as the profit and loss statement, is a key financial document for any business. It provides a summary of the company's revenues and expenses over a particular period, usually a quarter or a year. This statement helps in calculating the net income by subtracting total expenses from total revenues.
For example, if a business has revenue expenditures such as repair and maintenance costs and utility expenses, these are recorded on the income statement for the same period in which they occur.
  • This helps in determining the operational efficiency of a business.
  • It is crucial for stakeholders to assess the profitability of the company.

Moreover, by understanding the income statement, businesses can make informed decisions about their daily operations and strategies for financial improvement.
Repair and Maintenance Costs
Repair and maintenance costs are essential expenses incurred to keep assets in their original working condition. While they might not increase the asset's value or prolong its lifespan, they are necessary for maintaining productivity. These costs can range from simple repairs like fixing a leaky faucet to more extensive maintenance like servicing machinery.
It鈥檚 important to account for these expenses accurately.
  • They should be recorded in the income statement in the period they are incurred.
  • They ensure that the equipment and facilities function efficiently without significant interruptions.

By keeping track of repair and maintenance costs, businesses can better forecast future spending and avoid unexpected downtime.
Utility Expenses
Utility expenses are the recurring costs a business incurs to keep its operations running smoothly. These include expenses for electricity, water, gas, telephones, and internet services, which are indispensable for the day-to-day activities of most businesses.
Like other revenue expenditures, utility expenses are recorded in the income statement in the period they are incurred.
  • This helps provide a clear view of the business's operating costs.
  • Accurate accounting of utility expenses can aid in budgeting and controlling operational costs.

By closely monitoring utility expenses, businesses can identify areas for cost savings and become more energy-efficient, ultimately improving their bottom line.
Accounting for Expenditures
Proper accounting for expenditures, specifically revenue expenditures, is vital to present an accurate financial position of a company. Revenue expenditures are costs related to the day-to-day functioning of a business and must be reported in the income statement in the period in which they occur.
This practice ensures that financial statements reflect the true cost of operating expenses.
  • It helps in reducing taxable income legally by considering these as current period expenses.
  • Proper classification avoids misleading financial data, which can misinform stakeholders.

Understanding how to account for expenditures properly is integral for businesses to strategize their financial planning, manage cash flow effectively, and ensure compliance with accounting standards.

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Most popular questions from this chapter

Accounting for Plant Assets Ethan Corporation had the following transactions related to its delivery truck: Year 1 Jan. 5 Purchased for \(\$ 28,000\) cash a new truck with an estimated useful life of four years and a salvage value of \(\$ 4,000\). Feb. \(\quad 20\) Installed a new set of side-view mirrors at a cost of \(\$ 80\) cash. June \(\quad 9\) Paid \(\$ 325\) for an engine tune-up, wheel balancing, and a periodic chassis lubrication. Aug. 2 Paid a \(\$ 410\) repair bill for the uninsured portion of damages to the truck caused by Ethan's own driver. Dec. 31 Recorded depreciation on the truck for the year. Year 2 May 1 Installed a set of parts bins in the truck at a cost of \(\$ 950 \mathrm{cash}\). This expenditure was not expected to increase the salvage value of the truck. Dec. 31 Recorded depreciation on the truck for the year. Year 3 Dec. 31 Recorded depreciation on the truck for the year. Ethan's depreciation policies include (1) using straight-line depreciation, (2) recording depreciation to the nearest whole month, and (3) expensing all truck expenditures of \(\$ 100\) or less. Required Prepare journal entries to record these transactions and adjustments.

A company reports net income of \(\$ 12,000\), net sales of \(\$ 30,000\), and average total assets of \(\$ 48,000 .\) What is the company's asset turnover? a. \(0.625\) b. \(0.250\) c. \(0.400\) d. None of the above

What are five different types of intangible assets? Briefly explain the nature of each type.

Impairment Loss On July 1, 2015, Karen Company purchased equipment for \(\$ 325,000\); the estimated useful life was 10 years and the expected salvage value was \(\$ 40,000\). Straight-line depreciation is used. On July 1, 2019, economic factors cause the market value of the equipment to decrease to \(\$ 90,000\). On this date, Karen evaluates if the equipment is impaired and estimates future cash flows relating to the use and disposal of the equipment to be \(\$ 195,000\). a. Is the equipment impaired at July 1, 2019? Explain. b. If the equipment is impaired at July 1,2019 , calculate the amount of the impairment loss. c. If the equipment is impaired at July 1, 2019, prepare the journal entry to record the impairment loss.

Disposal of Plant Asset Crystal Company has a used delivery truck that originally cost \(\$ 24,200\). Straight-line depreciation on the truck has been recorded for three years, with a \(\$ 3,500\) expected salvage value at the end of its estimated six-year useful life. The last depreciation entry was made at the end of the third year. Four months into the fourth year, Crystal disposes of the truck. Required Prepare journal entries to record: a. Depreciation expense to the date of disposal. b. Sale of the truck for cash at its book value. c. Sale of the truck for \(\$ 17,000\) cash. d. Sale of the truck for \(\$ 10,000\) cash. e. Theft of the truck. Crystal carries no insurance for theft.
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