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Capital Expenditures:

Definition and Explanation:

An expenditure which results in the acquisition of permanent asset which is intended lo be permanently used in the business for the purpose of earning revenue, is known as capital expenditure. These expenditures are 'non-recurring' by nature. Assets acquired by incurring these expenditures are utilized by the business for a long time and thereby they earn revenue. For example, money spent on the purchase of building, machinery, furniture etc. Take the case of machinery-machinery is permanently used for, producing goods and profit is earned by selling those goods. This is not an expenditure for one accounting period, machinery has long life and its benefit will be enjoyed over a long period of time. By long period of time we mean a period exceeding one accounting period.

Moreover, any expenditure which is incurred for the purpose of increasing profit earning capacity or reducing cost of production is a capital expenditure. Sometimes the expenditure even not resulting in the increase of profit earning capacity but acquires an asset comparatively permanent in nature will also be a capital expenditure.

It should be remembered that when an asset is purchased, all amounts spent up to the point till the asset is ready for use should be treated as capital expenditure. Examples are: (a): A machinery was purchased for $50,000 from Karachi. We paid carriage $1,000, octroi duty $500 to bring the machinery from Karachi to Lahore. Then we paid wages $1,000 for its installation in the factory. For all these expenditures, we should debit machinery account instead of debiting carriage A/c, octroi A/c and wages A/c. (b): Fees paid to a lawyer for drawing up the purchase deed of land, (c): Overhaul expenses of second-hand machinery etc. (d): Interest paid on loans raised to acquire a fixed asset etc.

Examples:

  1. Purchase of furniture, motor vehicles, electric motors, office equipment, loose tools and other tangible assets.
  2. Cost of acquiring intangible assets like goodwill, patents, copy rights, trade marks, patterns and designs etc.
  3. Addition or extension of assets.
  4. Money spent on installation and erection of plant and machinery and other fixed assets.
  5. Wages paid for the construction of building.
  6. Structural improvements or alterations in fixed assets resulting in an increase in their useful life or profit earning capacity.
  7. Cost of issue of shares and debentures (certain expenditures are incurred by the companies when share and debentures are issued).
  8. Legal expenses on raising loans for the purchase of fixed assets.
  9. Interest on loan and capital during the construction period.
  10. Expenditures incurred for the development of mines and plantations etc.
  11. Money spent to bring a second-hand asset into working condition.
  12. Cost of replacing factory building from an old place to a new arid better site.
  13. Premium given for a lease.

Relevant Articles:

Capital Expenditures

Revenue Expenditures
Difference between Capital Expenditure and Revenue Expenditure
When Revenue Expenditures are not regarded as Revenue Expenditures?
Principles for making distinction between Capital and Revenue Expenditure
Capital and Revenue Receipts
Capital and Revenue Profits and Losses
Capital and Revenue Payments

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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