Capital Expenditure Vs. Revenue Expenditure
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Capital Expenditure Vs. Revenue Expenditure

Capital Expenditure Vs. Revenue Expenditure The main points of distinction between capital expenditure and revenue expenditure are follows. (i) Purpose : Capital expenditure is incurred for acquisition or erection of fixed assets to used in the business. On the other hand, revenue expenditure is incurred for the day-to conduct of business. (ii) Earning Capacity : Capital expenditure increases the earning capacity of the business whereas revenue expenditure does not increase the earning capacity as it is incurred maintaining the existing earning capacity. (iii) Period of Benefit : The benefit of capital expenditure extends to more than one year, the benefit of revenue expenditure extends only to the current year.

Capital Expenditure Vs. Revenue Expenditure

The main points of distinction between capital expenditure and revenue expenditure are follows.

(i) Purpose : Capital expenditure is incurred for acquisition or erection of fixed assets to used in the business. On the other hand, revenue expenditure is incurred for the day-to conduct of business.

(ii) Earning Capacity : Capital expenditure increases the earning capacity of the business whereas revenue expenditure does not increase the earning capacity as it is incurred maintaining the existing earning capacity.

(iii) Period of Benefit : The benefit of capital expenditure extends to more than one year, the benefit of revenue expenditure extends only to the current year.

(iv) Accounting Treatment: Capital expenditure is shown in the Balance Sheet as an asset, the other hand, revenue expenditure is shown as an expense in the Trading Account or Pro and Loss Account.

(v) Nature : Capital expenditure is of a non-recurring nature because such expenditure is nd incurred every day. On the contrary, revenue expenditure is recurring in nature as it is incurred on day to day operations.

, (vi) Effect on Assets : Capital expenditure leads to increase in the value of fixed assets. But revenue expenditure does not result in increase in the value of these assets.

Revenue expenditure treated as Capital Expenditure

The following expenses are revenue in nature. But they are treated as capital expenditure in the following circumstances.

1. Raw Materials and Stores : When these are used for manufacturing a fixed asset, these expenses are treated as capital expenditure.

2. Carriage and Freight : If these expenses are paid on the transportation of newly acquired fixed asset, these are treated as capital expenditure.

3. Wages : Wages paid for the construction of a building or for the installation of a machine are reated as capital expenditure and are added to the cost of the asset.

4. Repairs : Expenses incurred to repair a second hand machine, purchase by the firm, to make it usable are treated as capital expenditure.

5. Preliminary Expenses : Expenses incurred on the formation of a company are treated as capital expenses because their benefit will be available over a long period.

6. Brokerage : Brokerage paid on the purchase of a fixed asset is treated as capital expenditure.

7. Legal Expenses : Stamp duty and other legal expenses incurred in connection with the acquisition of fixed assets is treated as capital expenditure.

8. Advertising : Advertising expenses incurred for introducing a new product in the market are reated as capital expenditure.

9. Interest : Interest paid on loan and capital when paid during the construction of a fixed asset :s treated as capital expenditure.

 

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Comments (2)

I happen to know this topic :) nice article!

Thank you
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