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Capital & Revenue

Expenditure

The
most
important
factor
affecting the classification is the
nature of business.
Need to classify expenses into
capital and revenue
1. To adhere to Matching Principle
2. To enable a true and fair view of
financial statements
3. To show correct financial results

Capital & Revenue


Expenditure
Capital expenditure on items
that will be used time & time
again, that will continue to help
the business in the following
years is known as capital
expenditure
Revenue expenditure spending
on day to day items for the
running of the business.

Capital Expenditure means any expenditure


incurred to :

Acquire an asset and bring it into working


condition

Improve the efficiency or substantial working


life of the asset

Improve the performance of the business.

Gives benefit for longer period.

Is a non recurring expenditure

Shown in balance sheet on asset side

Reduces cost of production and increase the


profit of business.
Eg. 1.Purchase of machinery
2. Fees paid for installation of machinery
3. Custom duty paid for import of machinery

Revenue Expenditure means any expenditure


incurred to maintain the assets in working
condition and
for the operation of the business.
Incurred for a short period
It is a recurring expenditure
Shown in Trading or Profit and Loss A/c

Examples
1.Repairs of furniture
2.Painting of building
3.Purchase of stationery
4.Salaries

Deferred Revenue expenditure means


essentially a revenue expenditure but the
benefit of which is received over a period of
more than one year(2/3 years).
Incurred to get benefit for specified period.
Shown in Trading or Profit and Loss A/c and in
Balance Sheet
Examples :
1. Heavy research expenditure
2. Heavy advertisement expenditure

Distinction Between Capital


and Revenue Expenditures
Does the expenditure increase
capacity
or efficiency or extend useful life?

YES
Capital Expenditure
Debit Plant Assets
accounts

NO
Revenue Expenditure
Debit Repairs and
Maintenance account

Activity
On your book write on one
side
REVENUE expenditure
And on the other
CAPITAL expenditure

Is this Capital or Revenue


Expenditure?

Marketing
expenditure
Revenue
Expenditure

Is this Capital or Revenue


Expenditure?

New fleet of company


cars
Capital
Expenditure

Is this Capital or Revenue


Expenditure?

Ink cartridges
Revenue
Expenditure

Is this Capital or Revenue


Expenditure?

Inventories
Revenue
Expenditure

Is this Capital or Revenue


Expenditure?

Office Equipment
Capital
Expenditure

Is this Capital or Revenue


Expenditure?

Salaries
Revenue
Expenditure

Is this Capital or Revenue


Expenditure?

New factory
Capital
Expenditure