• 1 Marks

FA – Nov 2011 – L1 – SA – Q6 – Accounting Concepts

This question tests the conditions under which an expense is classified as revenue expenditure.

An expense will be classified as revenue expenditure if it
A. Contributes to the operating income of the business
B. Adds to or reduces the capital of the business
C. Necessitates the injection of additional capital
D. Adds to or improves the value of fixed assets
E. Necessitates calling a general meeting for shareholders’ approval

A. Contributes to the operating income of the business

Explanation: Revenue expenditure refers to the costs incurred in the normal operations of a business that help generate income in the current period, such as rent, utilities, and wages. These expenses do not add to the value of fixed assets but instead contribute directly to the business’s ability to earn revenue in the short term. Therefore, they are classified as revenue expenditures.

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