When an expense is treated as advance

What is the period of licence and what is it regarding. Usually such a payment is treated as a prepaid expense and you need to apportion the total amount into current period and next period. We have to treat the amount pertaining to the current period as an expense and the balance as an asset as prepaid expense.

Since the payment License renewal of a company is done in October for statutory fees through a third party, payment should be treated as advance for the time being till the actual receipt of  license renewal fees.

After receiving the actual receipt of license renewal fees, same should be debited to expenses account by squaring off the advance account.

CAPITAL EXPENDITURE

1. Nature of Assets purchased

Any expenditure incurred to acquire a fixed asset or in connection with installation (expenses forinstallation) of fixed asset is capital expenditure.

2. Discharging LiabilityAny expenditure incurred as price of goods purchased for resale along with other necessary expenses incurred in connection with such purchase are revenue expenses.

A payment made by a person to discharge a capital  liability is a capital expenditure

3. Based on Transactions

If expenditure is incurred to acquire a source of income, it is capital expenditure e.g., purchase of patents to produce picture tubes of TV set.

An expenditure incurred to earn an income is revenue expenditure. E.g.  salary, advertisement etc.

4. Purpose of Transactions

If the amount is spent on increasing the earning capacity of an asset it is capital expenditure

Any expenditure incurred on keeping an asset in running condition is revenue expenditure

5. Nature of Payments in the hands of payer

If the expenses is incurred for acquiring capital asset from revenue receipts is also treated as capital expenditure

If the nature of payment in the hands of payer is of revenue nature, it will be revenue expenditure.

CAPITAL EXPENDITURE

1. Cost of reconstructing, refurnishing, etc. of a business building.
2. Payment made with a view to keeping his competitor out of his field of business
3. Expenditure incurred in converting business premises when switching over from manufacture of one product to another.
4. Expenditure on litigation in connection with acquiring or curing defective assets of the business.
5. Compensation paid for cancellation of contract for the purchase of machinery.
6. Price paid for the purchase of partner's share in the firm.
7. Expenditure incurred on the maintenance of business reputation

In this You Debited to Third Party Advance. When Thrid Party give the Bill or Invoice in the name of Company than you should be Debited to Expenses Account and Pre Paid Expenses also.