Capital and Revenue Expenditure Examples
Capital expenditure-
It results in addition to an asset accident
expenditure incurred for improving and extending an existing asset is called
capital expenditure. It makes an asset more valuable & increases their
liability. Money spent on repairs to increase the life of an asset.
expenditure incurred for improving and extending an existing asset is called
capital expenditure. It makes an asset more valuable & increases their
liability. Money spent on repairs to increase the life of an asset.
· Expired
cost is called expenses
cost is called expenses
· Betterment
of fixed assets or improvement of an asset to produce more to improve its
earning capacity or to reduce its operating expenses or to increase the life of
asset.
of fixed assets or improvement of an asset to produce more to improve its
earning capacity or to reduce its operating expenses or to increase the life of
asset.
Examples of capital
expenditure:
1) Purchase of machinery
2) Purchase of land
3) Cost of making additions to the building
4) Enlarging the seating accommodation of a college hall
5) Interest on capital paid during the period of
construction
construction
6) Expenditure in connection with or incidental to the
purchase or installation of an asset.
purchase or installation of an asset.
7) Additions and extensions to existing assets.
8) Interest and financing charges paid, brokerage and
commission paid.
commission paid.
Revenue
expenditure:
Revenue expenditure is one that results in addition to an
expense account. Revenue expenditures do not increase the earning capacity of
the asset nor prolong is estimated useful life but represent normal maintenance
cost. Incurred in one period of the accounting the full benefit of which is
enjoyed in that period only. It includes all expenses which arise in the normal course
of business.
expense account. Revenue expenditures do not increase the earning capacity of
the asset nor prolong is estimated useful life but represent normal maintenance
cost. Incurred in one period of the accounting the full benefit of which is
enjoyed in that period only. It includes all expenses which arise in the normal course
of business.
Examples
Are
selling and distribution expenses incurred for sale of finished goods e.g.
sales office expenses, delivery expenses & advertisement expenses.
Are
selling and distribution expenses incurred for sale of finished goods e.g.
sales office expenses, delivery expenses & advertisement expenses.
RELATED CONTENT: ERROR
OF PRINCIPLE
OF PRINCIPLE
Some examples when revenue expenditure may
become a capital expenditure
1) Repairs are usually revenue expenditure but if we
purchase second-hand machinery and pay for repairs necessary to make it suitable
for our purpose then such repairs become capital expenditure & should be
added to the cost of the machinery.
purchase second-hand machinery and pay for repairs necessary to make it suitable
for our purpose then such repairs become capital expenditure & should be
added to the cost of the machinery.
2) Wages are usually revenue charges but if we paid to the
employees for the constructions or erection or installation of the fixed assets
of the business then these become be added to the cost of the fixed assets
concerned.
employees for the constructions or erection or installation of the fixed assets
of the business then these become be added to the cost of the fixed assets
concerned.
3) Legal expenses are usually revenue charges but if paid
for conveyancing (transferring property) on the acquisition of property should form
an additional cost of the asset acquired.
for conveyancing (transferring property) on the acquisition of property should form
an additional cost of the asset acquired.
4) Freight and carriage are usually a revenue item but
payments made for transporting newly acquired asset will form additional cost of
the asset this being treated as capital expenditure.
payments made for transporting newly acquired asset will form additional cost of
the asset this being treated as capital expenditure.
5) Interest on borrowings and capital generally revenue item
is allowed to be treated as a capital item if paid during the period of construction.
is allowed to be treated as a capital item if paid during the period of construction.
6) Preliminary expenses- Initial expenses connected with the
formation of a company through revenue in nature are allowed to be capitalized
and can be shown as an asset in the balance sheet.
formation of a company through revenue in nature are allowed to be capitalized
and can be shown as an asset in the balance sheet.
Deferred Revenue
expenditure:
It includes those non-recurring expenses which are expected
to be of financial nature, distributed to several accounting periods of
indeterminate total length. Quasi capital nature, the benefits which extended
to a number of years are 3 to 5 years.
to be of financial nature, distributed to several accounting periods of
indeterminate total length. Quasi capital nature, the benefits which extended
to a number of years are 3 to 5 years.
Examples
are
expense on Research & development, heavy advertisements.
are
expense on Research & development, heavy advertisements.
Difference between capital and revenue expenditure
|
|
Capital expenditure
|
|
Revenue expenditure
|
|
1
|
It is
incurred for the acquisition of fixed assets. |
1
|
It is
incurred for running the business. |
|
2
|
These are
incurred in increasing the value of fixed assets. |
2
|
They do not
increase the value of fixed assets. |
|
3
|
They
increase the earning capacity of the business. |
3
|
They are incurred
to maintain the earning capacity of the business. |
|
4
|
The benefit of
such expenditure extends to more than one year. |
4
|
The benefits
is limited to one year only. |
|
5
|
These expenses are of a non-incurring nature.
|
5
|
These expenses
are of a recurring nature. |
|
6
|
They are
shown in the balance sheet. |
6
|
They are
shown in trading and & L A/C. |