It is necessary to distinguish between two types of expenditure-Capital and Revenue Expenditure.
An expenditure incurred to acquire an asset or a benefit, which will be available for a long time, is
capital expenditure. When the earning capacity of a business is increased it is also capital expenditure. Amount spent to buy fixed asset comes under Capital expenditure .
Examples are money spent to acquire machinery, repair expenses of second hand
machinery purchased, purchase of goodwill of a running business, etc.
expenditure whose benefit
is available only for the present is revenue expenditure. Examples are, payment of the wages,
salaries, rent and expenditure on advertising etc.
Capital expenditure is an asset, revenue expenditure is an expense.
Out of current income
expenses should be met, but in respect of assets only the diminution in their value should be met,
out of current income, which is called Depreciation in Accounting.
Remember also that when assets (except goods) are sold the proceeds are not to be treated as
sales in the ordinary sense. The proceeds are “Capital Receipts”. If the asset has been sold at a
price higher than its book-value or recorded value, the difference can be treated as profit.
Similarly, if the amount received by its sale is less than its recorded value, the difference must be
treated-as a loss.
Distinction between capital and revenue is very Important but is not always easy. But a
golden rule is: if an expenditure results in increased capacity for business or reduced costs in producing goods or, of course, in the acquisition of an asset, it is capital expenditure. Otherwise,
it is revenue expenditure, making new exits in a cinema house is revenue expenditure because
capacity is not increased. But making a gallery to seat more people is capital expenditure.
Deferred Revenue Expenditure. Sometimes a very heavy expenditure of revenue nature is
incurred. If its benefit will be available for three or four years (as in case of heavy advertising to
launch a new product) the expenditure is deferred Revenue Expenditure.
An expenditure incurred to acquire an asset or a benefit, which will be available for a long time, is
capital expenditure. When the earning capacity of a business is increased it is also capital expenditure. Amount spent to buy fixed asset comes under Capital expenditure .
Examples are money spent to acquire machinery, repair expenses of second hand
machinery purchased, purchase of goodwill of a running business, etc.
expenditure whose benefit
is available only for the present is revenue expenditure. Examples are, payment of the wages,
salaries, rent and expenditure on advertising etc.
Capital expenditure is an asset, revenue expenditure is an expense.
Out of current income
expenses should be met, but in respect of assets only the diminution in their value should be met,
out of current income, which is called Depreciation in Accounting.
Remember also that when assets (except goods) are sold the proceeds are not to be treated as
sales in the ordinary sense. The proceeds are “Capital Receipts”. If the asset has been sold at a
price higher than its book-value or recorded value, the difference can be treated as profit.
Similarly, if the amount received by its sale is less than its recorded value, the difference must be
treated-as a loss.
Distinction between capital and revenue is very Important but is not always easy. But a
golden rule is: if an expenditure results in increased capacity for business or reduced costs in producing goods or, of course, in the acquisition of an asset, it is capital expenditure. Otherwise,
it is revenue expenditure, making new exits in a cinema house is revenue expenditure because
capacity is not increased. But making a gallery to seat more people is capital expenditure.
Deferred Revenue Expenditure. Sometimes a very heavy expenditure of revenue nature is
incurred. If its benefit will be available for three or four years (as in case of heavy advertising to
launch a new product) the expenditure is deferred Revenue Expenditure.
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