The Difference between Capital and Revenue Expenditure

                                                                

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.

    ·       Expired 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.

   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

6) Expenditure in connection with or incidental to the purchase or installation of an asset.

7) Additions and extensions to existing assets.

8) Interest and financing charges paid, brokerage and 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.

Examples 

Are selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses & advertisement expenses.

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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.

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.

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.

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.

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.

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.

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.

Examples 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.