Difference between Capital Expenditure and
Revenue Expenditure:
Revenue Expenditure
|
Capital Expenditure
|
| 1. |
Its effect is
temporary, i.e. the benefit is received
within the accounting year. |
1. |
Its effect is
long-term, i.e. it is not exhausted within
the current accounting year-its benefit is
received for a number of years in future.
|
| 2. |
Neither an
asset is acquired nor the value of an asset
is increased. |
2. |
An asset is
acquired or the value of an existing asset
is increased. |
| 3. |
It has no
physical existence because it is incurred on
items which are used by the business.
|
3. |
Generally it
has physical existence except intangible
assets. |
| 4. |
It is
recurring and regular and it occurs
repeatedly. |
4. |
It does not
occur again and again. It is nonrecurring
and irregular. |
| 5. |
This
expenditure helps to maintain the business.
|
5. |
This
expenditure improves the position of the
business. |
| 6. |
The whole
amount of this expenditure is shown in
trading P & L A/c or income statement.
|
6. |
A portion of
this expenditure (depreciation on assets) is
shown in trading & P & L A/c and the balance
is shown in the balance sheet on asset side. |
| 7. |
It does not
appear in the balance sheet. |
7. |
It appears in
the balance sheet until its benefit is fully
exhausted. |
| 8. |
It reduces
revenue (profit) of the business.
|
8. |
It does not
reduce the revenue of the concern. Purchase
of fixed asset does not affect revenue.
|
Example:
State with reasons
whether the fallowing items of expenditure are
capital or revenue.
(i) Wages paid on
the purchase of goods.
(ii) Carriage paid
on goods purchased.
(iii)
Transportation paid on machinery purchased.
(iv) Octroi duty
paid on machinery.
(v) Octroi duty
paid on goods.
(vi) A second-hand
car was purchased for $7,000 and $5,000 were spent
for its repairs and overhauling.
(vii) Office
building was whitewashed at a cost of $3,000.
(viii) A new
machinery was purchased for Rs.80,000 and a sum of
Rs.1,000 was spent on its
installation and erection.
(ix) Books were
purchased for $50,000 and $1,000 were paid for
carrying books to the library.
(x) Land was
purchased for $1,00,000 and $5,000 were paid for
legal expenses.
(xi) $50,000 were
paid for customs duty and freight on machinery
purchased fromJapan.
(xii) Old furniture
was repaired at a cost of $500.
(xiii) An
additional room was constructed at a cost of
$15,000.
(xiv) Damages paid
on account of the breach of contract to supply
certain goods.
(xv) Cost of
replacement of an old and worn out part of
machinery.
(xvi) Repairs to a
motor car met with an accident.
(xvii) $10,000 paid
for improving a machinery.
(xviii) Cost of
removing plant and machinery to a new site.
(xix) Cost of
acquiring the goodwill of an old firm.
(xx) Cost of
redecorating a cinema hall.
(xxi) Cost of
putting up a. gallery in a cinema hall.
(xxii) Compensation
paid to a director for loss of his office.
(xxiii) Premium
paid on the redemption of debentures.
(xxiv) Costs of
attending a mortgage.
(xxv) Commission
paid on issue of debentures.
(xxvi) Cost of
air-conditioning the office of the director of a
company.
(xxvii) Repairs and
renewal of machinery.
(xxviii) Cost of
acquiring patent rights and trade marks.
(xxix) Compensation
paid to workers for termination of their services.
(xxx) Compensation
paid to a person injured by company's car.
(xxxi) Expenditures
incurred on alteration in windows ordered by
municipal authorities.
(xxxii) Painting
expenditures of a newly-constructed factory.
(xxxiii)
Expenditures incurred on renewal of patent.
(xxxiv)
Expenditures on replacement of a slate roof by a
glass roof.
(xxxv) $10,000
spent on dismantling, removing and reinstalling
machinery and
fixtures.
(xxxvi) legal
expenses incurred in an income tax appeal.
Solution:
|
|
Sr. No. |
Nature
of Expenditure |
Reasons |
|
Wages A/C
is debited. |
(i) |
Revenue
expenditure |
Wages paid
on goods purchased and a revenue
expenditure because goods purchased are
meant for resale. It is recurring by
nature as goods are purchased repeatedly
in a business. |
|
Carriage
A/c is debited. |
(ii) |
Revenue
expenditure. |
The
carriage paid on purchases is a revenue
expenditure because goods purchased are
meant for resale and whenever goods are
purchased carriage is paid to bring the
goods to the godown of the business. |
|
Machinery
A/c is debited instead of transportation
A/c. |
(iii) |
Capital
expenditure. |
A
machinery purchased is useless until it
is brought to the business. As machinery
is a fixed asset and transportation paid
is an additional cost to the machinery,
so it is a capital expenditure.
|
|
Machinery
A/c is debited instead of octroi duty
A/c |
(iv) |
Capital
expenditure. |
Octroi
duty paid on machinery is also an
additional cost to the machinery, If it
is not paid, the machinery cannot be
taken to the business, so it is a
capital expenditure. |
|
Octroi
duty A/c is debited. |
(v) |
Revenue
expenditure. |
Octroi
duty paid on goods is a revenue
expenditure because goods mean saleable
goods. It is recurring and is paid
repeatedly whenever goods are purchased. |
|
For both
expenditures motor car A/C is debited |
(vi) |
Capital
expenditure. |
A
second-hand car is a fixed asset as it
"can be used for many years and its
utility does not diminish in one year,
so it is a capital expenditure. But it
is useless if it is not made good to
work, so the amount spent on its repair
and overhauling is also a capital
expenditure. |
|
White
washing A/c is debited. |
(vii) |
Revenue
expenditure. |
Whitewashing of a building is necessary
for its maintenance and because of this
expenditure the profit earning capacity
of the business has not increased, so it
is a revenue expenditure. |
Machinery
A/c debited for all
expenditure. |
(viii) |
Capital
expenditure. |
Machinery
is a permanent asset of the business and
can be used for many years but it will
benefit to the business until it is
installed and erected at a proper place.
So amount spent on purchase of
machinery, on its installation and
erection is capital expenditure. |
For bath
expenditures Books
A/c is debited. |
(ix) |
Capital
expenditure. |
Fixed
asset "Books" has been acquired and can
be used for many years. Cost of carrying
books is regarded as a part of purchase
price of the books, so it is a capital
expenditure. |
|
Land A/c
is debited. |
(x) |
Capital
expenditure. |
Land
purchased is a fixed asset. All
expenses' connected with its acquisition
are regarded as a part of its purchase
price. |
|
Machinery
A/c is debited. |
(xi) |
Capital
expenditure. |
Machinery
is a fixed asset. All expenses connected
with its import from Japan are regarded
as a part of its purchase price, So it
is capital expenditure. |
|
Repair A/c
is debited. |
(xii) |
Revenue
expenditure. |
Value of
furniture does not increase as a result
of
its repair -- it is simply kept in a
proper working condition. |
|
Building
A/c is debited. |
(xiii) |
Capital
expenditure. |
This is an
addition to a fixed asset and as a
result of this expenditure the value of
the building has increased, so it is a
capital expenditure. |
|
Damages
A/c or general expenses is debited. |
(xiv) |
Revenue
expenditure. |
In this
case the goods have not been supplied by
the business to the customer according
to the contract between them. The
customer claimed damages which the
business paid. It is a usual thing that
happens in ordinary course of trading,
so it is a revenue expenditure. |
Repair and
maintenance A/c
is debited. |
(xv) |
Revenue
Expenditure. |
A worn out
part of the machinery is simply the cost
of repair and maintenance of fixed
asset. The value and profit earning
capacity of the machinery has not
increased in any way, so it is a revenue
expenditure. |
|
Repair to
car A/c is debited. |
(xvi) |
Revenue
Expenditure |
Cost of
repair to a motor car does not increase
the value of the car, it is simply
incurred to put back the car into
working condition, so it is a Revenue
expenditure. |
|
Machinery
A/c is debited. |
(xvii) |
Capital
expenditure. |
Cost has been incurred to 'improve (h
machinery. It increases the value and
profit earning capacity of the
machinery, so it is capital expenditure. |
|
Plant and
, Machinery A/c is debited. |
(xviii) |
Capital
expenditure. |
Plant and machinery have been removed to
a new site in order to increase their
profit-earning capacity, so cost of
removal is a capital expenditure. |
|
Goodwill
A/c is debited. |
(xix) |
Capital
expenditure. |
Goodwill is an intangible asset and it
will benefit to the business for many
years. So cost of acquiring goodwill
(using the name of an old firm) is
always a capital expenditure. |
|
Re-decoration 'A/c or Maintenance A/c is
debited. |
(xx) |
Revenue
expenditure. |
Generally a cinema hall is decorated
regular and re-decorating cost is a
recurring expenditure Moreover, it will
not add to the capacity of the hall, so
it is a revenue expenditure. |
|
Cinema
hall A/c or Building ' debited. |
(xxi) |
Capital
expenditure. |
As a
gallery has been put up in the cinema
hall, it increases the capacity of the
hall, which in turns enhances the
profit-earning capacity of the business,
therefore, the cost is treated as a
capital expenditure. |
|
Expense
A/c is debited. |
(xxii) |
Revenue
expenditure. |
Compensation paid to the director of a
company ,for the loss of his office is a
revenue expenditure because the company
will get the benefit of this expenditure
only for one year. |
|
|
(xxiii) |
Capital
expenditure. |
By issuing
debentures, money is borrowed from the
public for a long period of time and is
used in the purchase of fixed assets or
on the expansion of the business,
therefore, premium paid is a capital
expenditure. |
|
|
(xxiv) |
Capital
expenditure. |
Mortgage
means a deed showing that the money has
been borrowed (loan raised) by
mortgaging assets as collateral
security. The assets will remain
mortgaged with the lender until the loan
has been repaid. So the assets have been
utilized for raising loan and the costs
attending the mortgage is, therefore, a
capital expenditure. |
|
|
(xxv) |
Capital
expenditure. |
Debentures
are considered as borrowed capital and
are used for the acquisition of fixed
assets such as machinery etc.,
therefore, commission paid on issue of
debentures is a capital expenditure. |
|
|
(xxvi) |
Capital
expenditure. |
By making
the office of the director,
air-conditioned, the efficiency of the
director will increase and it will last
for many years, so cost of
air-conditioning is a capital
expenditure. |
|
Repair A/c
is debited. |
(xxvii) |
Revenue
expenditure. |
Annual
repair and renewal of machinery is
necessary to keep it in a proper working
condition, therefore, this expenditure
is considered as a revenue expenditure. |
|
|
(xxviii) |
Capital
expenditure. |
Patents
and trade marks are intangible assets,
the benefit of, which is received for
many years, so cost of acquiring these
assets is a capital expenditure. |
|
|
(xxix) |
Capital
expenditure. |
By
terminating inefficient workers, the
business will run more economically and
profit-earning capacity of the business
will increase, so compensation paid to
them is a capital expenditure. |
|
|
(xxx) |
Revenue
expenditure. |
It
happened in the ordinary course of
business, so, compensation paid to the
injured person is a revenue expenditure. |
|
|
(xxxi) |
Revenue
expenditure. |
This
expenditure will add nothing to the
value of the building and will have no
effect on the profit-earning capacity of
the business, so it is a revenue
expenditure. |
|
|
(xxxii) |
Capital
expenditure. |
Amount
spent on painting a new factory is
regarded as a part of the cost of
factory building, therefore, it is a
capital expenditure. |
|
|
(xxxiii) |
Revenue
Expenditure. |
If patent
is renewed annually, then it is a
revenue expenditure as it has been
incurred in the ordinary course of
business. |
|
|
(xxxiv) |
Capital
expenditure. |
As a slate
roof is replaced by a glass roof, it
will increase the efficiency of the
building and therefore, it is a capital
expenditure. |
|
|
(xxxv) |
Revenue
Expenditure |
Amount of
$10,000 spent on dismantling removing
and re-installing machinery an fixtures
will be treated as revenue expenditure.
may be treated as deferred revenue
expenditure item and spread over a
number of years. |
|
|
(xxxvi) |
Revenue
Expenditure |
This
expenditure has been incurred in the
ordinary course of the business being
expense o carrying on the business,
therefore, it is a revenue expenditure. |
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