Capital Expenditure and Revenue Expenditure:
• Any expenditure which is incurred in acquiring or increasing the value of a fixed asset is termed as capital expenditure.
• As such, the amount spent on the purchase of Land and Building, Plant and Machinery, Furniture etc. is capital expenditure.
• Such expenditure yields benefit over a long period and hence is written in Assets.
Examples of capital expenditure:
I. Expenditure which results in the acquisition of a fixed asset such as land, building, plant, motor vehicles, trade marks, etc. Such asset would be used in the business for a number of years.
II. Expenditure in connection with the purchase or erection of a fixed asset such as wages paid to workers for erecting machines, cartage paid on acquiring plant and machinery, over-hauling of second-hand machines etc.
III. Expenditure which results in the extension or improvement of fixed assets and, which increases the earning capacity of such assets such as amount spent on increasing the seating capacity of a cinema hall.
IV. All amount spent upto the point an asset is put to use is treated as capital expenditure. Thus, legal fees and brokerage paid to acquire a property and interest paid on loans taken to acquire the asset for the period before the asset is put to use is capital expenditure and is added to the cost of such asset. But interest on loan for the period after the asset is put to use is treated as revenue expenditure.
V. Expenditure incurred for establishing the business, e.g., the cost of a patent, preliminary expenses, goodwill etc.
VI. Interest on capital upto the point production is ready to commence or during the period of formation of company.
VII. Expenditure incurred on the purchase of second-hand asset and on putting such asset into working condition.
• Any expenditure, the benefit of which is received during the current year itself is termed as revenue expenditure.
• As such, all the revenue expenditures are debited to Trading and Profit & Loss Account. • Such expenditure does not result in an increase in the earning capacity of the business but only helps in maintaining the existing earning capacity.
Examples of capital expenditure:
I. Expenses incurred for the purpose of day to day running of business such as manufacturing expenses, office expenses, selling expenses etc.
II. Expenses incurred on the ordinary repairs and maintenance of fixed assets, white-washing of building etc.
III. Payment for goods purchased for resale.
IV. Depreciation on fixed assets.
V. Purchase of raw materials for converting it into finished goods.
VI. Interest on loan and interest on capital for the period after the asset is put to use.
VII. Replacement of worn-out part of an existing machine.
VIII. Loss from sale of fixed assets.
Distinction between Capital Expenditure and Revenue Expenditure:
|S.No.||Point Of difference||Capital Expenditure||Revenue Expenditure|
|1||Meaning||Capital expenditure is incurred for the acquisition or erection of a fixed asset.||revenue expenditure is incurred for the day-to day running of the business.|
|2||Purpose||Capital expenditure is incurred for the purpose of increasing the earning capacity.||revenue expenditure is incurred for maintenance of earning capacity.|
|3||Benefit||Capital expenditure yields benefit normally over a long period.||revenue expenditure yields benefit for a maximum period of one year.|
|4||Accounting treatement||Capital expenditure is written in the balance sheet.||revenue expenditure is written in Trading or Profit & Loss Account.|
Deferred Revenue Expenditure:
• There are certain expenditures which are revenue in nature but the benefit of which is likely to be derived over a number of years.
• Such expenditures are termed as 'Deferred Revenue Expenditures'. The benefit of such an expenditure generally lasts between 3 to 7 years.
• As such, the whole of such expenditure is not debited to the Profit and Loss Account of the current year but spread over the years for which the benefit is likely to last.
• Thus, only a part of such expenditure is taken to Profit & Loss Account every year and the unwritten off portion is allowed to stand on the assets side of the Balance Sheet.
• For example, a firm spent a huge amount of 2,00,000 on advertising to introduce a new product in the market and it is estimated that its benefit will last for 4 years. In this case, 50,000 will be charged to the P & L A/c of each year for four consecutive years. Entry will be:
Profit & Loss Alc Dr. 50,000 To Advertisement Alc 50,000 (1/5 of Advertisement expenses charged to P & L A/c).
• 50,000 will be debited to P & L Alc of each year and the balance will be treated as an asset and shown on the Assets side of the Balance Sheet.
• As such, the amounts shown on the Assets side will be 50,000 in the first year, I ,00,000 in the second year and 50,000 in the third year.
Capital Receipts and Revenue Receipts:
Revenue receipts: are shown on the credit side of Trading and Profit & Loss Account as they are revenue in nature.
(i) Amount received from the sale of fixed assets or investments.
(ii) Capital contributed by proprietors, partners or money obtained from issue of shares and debentures in case of company.
(iii) Amount received by way of loans
Capital receipts are shown in the Balance Sheet either as increase in liabilities or as reduction in the value of the assets.
(i) Money obtained from sale of goods.
(ii) Commission and fees received for services rendered.
(iii) Interest and dividend received on investments.