capital and revenue expenditures 03-07

8/8/2019 Capital and Revenue Expenditures 03-07

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CAPITAL AND REVENUE

EXPENDITURES

CAPITAL EXPENDITURE:

It means an expenditure which has been incurred for

the purpose of obtaining a long-term advantage for the business.

Such expenditure in either incurred for acquisition of an asset

(tangible or intangible ) which can later be sold and converted

into cash or which result in increasing the earning capacity of the

business or some other advantages to the business.

EXAMPLES OF CAPITAL EXPENDITURE:

Incurred in increasing the quality of fixed assets.

Ex: Purchase of additional furniture, machinery,etc

Incurred in increasing the quantity of fixed assets.

Ex: expenditure incurred for increasing the useful life or

capacity or efficiency of a fixed assets.

Incurred for substitution of a new asset for an existing

asset.

Incurred in connection with the purchase , receipt, erection

of fixed assets.

Ex: erection charges of a new plant , the cartage charges paid

for bringing to the factory plant & machinery purchased

Incurred for acquired the right of carrying on a business.

Ex: purchase of patent rights, copy rights, goodwill ,etc.

REVENUE EXPENDITURE:



An expenditure that arises out of and in the courses

of regular business transactions. It may simply be termed as

“expense”.

EXAMPLES FOR REVENUE EXPENDITURE:

Incurred in the normal course of running business.

Ex: expenditure of administration , cost incurred in

manufacturing and selling the products.

Incurred to maintain the business.

Ex: money spent for repairs of existing fixed assets or cost of

stores consumed , etc.

Cost of goods purchased for resale.

Depreciation on fixed asset, interest on loans for the

business.

DISTINCTION BETWEEN CAPITAL & REVENUE

EXPENDITURE

CAPITAL

REVENUE

A. Incurred for acquisition of fix A. Incurred for day–

to–day

assets for the business. operation of the business.

B. Incurred to increase the earning B. Incurred for

maintaining the



capacity of the business. Earning

capacity of business.

C. Non – recurring nature. C. Recurring nature.

D. The benefit is received over a D. The benefitexpires in the year

number of years and only a in which the

expenditure is

small part of it ,as depreciation incurred and it is

entirely

is charged to P & L a/c and changed to the P&L a/c for the

rest appears in balance sheet. relevant year.

DEFERRED REVENUE EXPENDITURE:

It is that class of revenue expenditure which isincurred during an accounting period, but is applicable either

wholly or in part to future periods.

PICKLETS & DUNKERLEY have in their book

“Accounting” classified into four distinct types.

1. Expenditure wholly paid for in advance, where no service has

yet been rendered, necessitating its being carried forward

i.e., the showing of such outlay as an asset in the Balancesheet as prepaid expenditure,

Ex: Telephone rent, office rent, paid in advance , etc.

2. Expenditure partly paid in advance , where a portion of the

benefit



has been derived within the period under review , the

balance being as yet ‘unused’ , and therefore shown in the

balance sheet as an asset ,

Ex: proportion of rates paid in advance or special advertisingexpenditure incurred in introducing a new line or developing a

new market. Most items paid in advance will fall either under

head (i) or (ii), accounting as the payment relates wholly or party

to future periods.

3. Expenditure in respect of service rendered which for any

should reason is considered as an asset, or more properly, is

not considered to be allocable to the period in question,

Ex: Development costs in mines and plantations, discount on

debentures in limited companies and cost of experiments.

4. Amounts representing losses of an exceptional nature,

Ex: properly confiscated in a foreign country , heavy loss of

non-insured assets through, say , fire.

REVENUE EXPENDITURE BECOMING CAPITAL

EXPENDITURE

Expenditure which usually of a revenue nature

may be taken as an expenditure of a capital nature

1.Repairs :The amount spent on repairs of plant ,furniture

,buildings ,etc .,is taken as a revenue expenditure . However,when some second hand plant, motorcar , etc., is purchased the

expenditure incurred for immediate repairs of such plant,

motorcar, etc., to make it fit for use will be taken as a capital

expenditure.



2.Wages : The amount spent as wages is usually taken as a

revenue expenses. However, amount of wages paid for erection of

a new plant or machinery or wages paid to workmen engaged in

construction of a fixed assets are taken as expenditure of a

capital nature.

capital and revenue expenditures 03-07

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