Q.(OR) What is depreciation? Briefly explain three causes of depreciation.

Accounting Terminology Distinction: Capital vs Revenue Expenditure

Let me start with something you already know from daily life. When you buy a chocolate, you eat it — it's gone. When you buy a bicycle, you use it for years. In accounting, we treat these two purchases very differently, and that distinction is the foundation of everything that follows.

The Everyday Intuition

Think of your pocket money. If you spend ₹50 on a movie ticket, that money is gone — you enjoyed the movie, and there's nothing left to show for it tomorrow. But if you spend ₹5,000 on a smartphone, you still have the phone next month, next year. The first is an expense of the period; the second is an asset that keeps giving you value over time.

This is exactly the distinction between Revenue Expenditure and Capital Expenditure in accounting.

The Precise Meaning

Revenue Expenditure is spending that benefits only the current accounting period. It maintains the earning capacity of the business but does not increase it. Examples: rent, salaries, repairs, electricity bills, raw materials.

Capital Expenditure is spending that benefits more than one accounting period. It either acquires a fixed asset or improves its earning capacity. Examples: buying machinery, building a factory, installing a new production line that doubles output.

Why This Distinction Matters

This is not just academic theory. It directly affects the profit you report and the assets you show on your balance sheet.

If you treat a capital expenditure (say, buying a ₹1,00,000 machine) as a revenue expenditure, you will:

• Overstate expenses in the current year by ₹1,00,000
• Understate profit by ₹1,00,000
• Show no machine as an asset on your balance sheet

If you treat a revenue expenditure (say, ₹5,000 repair) as a capital expenditure, you will:

• Understate expenses in the current year
• Overstate profit
• Show a fictitious asset on your balance sheet

Both errors mislead anyone reading the financial statements — investors, banks, the tax department.

Accounting Treatment

Revenue Expenditure

• Debit the expense account (e.g., Repairs A/c, Salary A/c)
• Credit Cash/Bank A/c or Creditor A/c
• The entire amount is charged to the Profit & Loss Account of the current year

Capital Expenditure

• Debit the fixed asset account (e.g., Machinery A/c, Building A/c)
• Credit Cash/Bank A/c or Creditor A/c
• The asset appears on the Balance Sheet and is depreciated over its useful life

A Special Case: Deferred Revenue Expenditure

Sometimes, a large revenue expenditure benefits more than one year but is not a fixed asset. For example, a company spends ₹2,00,000 on a massive advertising campaign for a new product launch. The benefit may last 3 years.

Treatment: This is called Deferred Revenue Expenditure. It is shown as a fictitious asset on the Balance Sheet and written off over the period it benefits — say, ₹66,667 per year for 3 years. …