Capital expenditure means the expenditure the benefit of which is not exhausted within the current year but is enjoyed over a long time period. Such expenditure is of non-recurring nature and results in acquisition of permanent assets. Property acquired with the help of capital expenditure is utilized by the business for a long time and thereby it earns revenue.
Capital expenditure means the expenditure the benefit of which is not exhausted within the current year but is enjoyed over a long time period. Such expenditure is of non-recurring nature and results in acquisition of permanent assets. Property acquired with the help of capital expenditure is utilized by the business for a long time and thereby it earns revenue. Thus, all expenditure incurred to acquire or increase the value of fixed assets which are used in the business for the purpose of earning revenue is called capital expenditure. The main features of capital expenditure are as below.
• Capital expenditure results in the acquisition of permanent assets such as land and buildings, plant and machinery furniture, etc.
• These assets are intended to be used in the business for earning revenue over several years.
• Capital expenditure includes expenses incurred for making the asset ready for use, e.g wages paid for erecting machines, cost of the platform on which the machine will be fixed cartage paid on acquiring plant and machinery,
• Expenditure incurred for the extension of or improvement in fixed assets is also Capital expenditure. Such expenditure e.g. over hauling of second hand machinery, etc. helps to increase the profit earning, capacity of business by increasing output or reducing costs
• Capital expenditure includes the expenses incurred to acquire the right to carry on business, e.g. cost of license, legal fees and brokerage paid to acquire an asset,
• Expenses incurred to acquire intangible assets such as goodwill, patents, etc. are also capital expenditure,
• Expenses incurred to establish a business, e.g. preliminary expenses for incorporation of a company, etc.
• Expenses incurred on issuing shares and debentures.
• Expenses incurred on raising loans for the business. Expenses incurred to reduce operating costs e.g. conversion of hand driven machinery into power driven machinery.
• Expenses incurred in tea and rubber plantations, horticulture, etc. during the development process before they begun to yield any income. Such expenditure is called development expenditure.
The amount spent, the manner of payment, the source of payment and the use of money by recipient are not relevant for determining whether expenditure is of a capital nature, expenditure will not be capital expenditure merely because the amount spent is large or because it is paid in installments or because the money was raised through a loan.
Some examples of capital expenditure are given below :
(a) Purchase of land, building, plant and machinery, equipments, furniture, loose tools, etc
(b) Cost of addition, extension and improvements to existing fixed assets.
(c) Cost of overhauling second hand machines.
(d) Expenses incurred for putting an asset into a working condition.
(e) Cost of increasing or improving the earning capacity or installed capacity of the business.
(f) Cost of intangible assets such as goodwill.
(g) Expenses incurred in connection with the purchase of land or building such as fees paid lawyer or registration fee.
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