When Revenue Expenditures are not regarded as
There are some
items of expenditure which are revenue by nature,
yet they are not regarded as revenue expenditure.
Such expenditures may be divided into two groups:
1. Deferred Revenue Expenditure:
This is a revenue
expenditure, the benefit of which is not confined to
one accounting year - it extends to future
accounting year or years also. However, this
expenditure does not result in the acquisition of
any fixed asset. For example, heavy advertisement
expenditure is incurred on introduction of a new
product in the market. This is a revenue expenditure
in nature and the benefit is enjoyed by the business
over a number of years, but no asset of permanent
nature is acquired. A portion of this expenditure is
treated as revenue expenditure chargeable in the
current accounting year and the remaining portion is
temporarily treated as capital expenditure and shown
on the Asset side of the Balance Sheet. Below are a
few examples of such expenditure:
incurred to the formation of a joint stock company
i.e. Preliminary Expenses.
(b) Expenditure on
research and experiment connected with the
introduction of a new product.
expenditure on advertisement for marketing a new
expenditure on repairs to property.
(e) Expenditure on
removal of business from one place to another place.
2. Capitalized Expenditure:
although of revenue nature basically, are directly
connected with fixed assets and spent directly on
the acquisition of fixed assets. Such expenditures
are added to the cost of assets and are called
"Capitalized Expenditures". For example, we buy a
second-hand plant for $50,000. This is undoubtedly a
capital expenditure. A further sum of $5,000 is
spent on its repair and overhauling in order to
bring the plant into proper working order.
Expenditure on account of repair and overhauling,
although revenue by nature, will be treated as
Capital Expenditure in this case and will be debited
to plant account not to Repairs A/c. Thus, a revenue
expenditure which increases the utility or
productive capacity of an asset, is treated as
capitalized expenditure. Below are a few examples of
(a) Expenditure on
installing an asset. i.e. installation charges.
(b) Expenditure on
repair to property, if the production capacity or
utility of the property is increased. It may,
however, be noted that sometimes a new asset may
require some repair after its purchase but before it
is installed and put into operation. Cost of such
repair, although it may not increase the production
capacity of the asset, will be treated as a
incidental to purchase of fixed assets, e.g.
freight, clearing charges, customs duty, carriage,
octroi duty, import duty on assets purchased.
(d) Expenditure on
removal of old property.
(e) Cost of repair
to second-hand assets: Repair is a revenue
expenditure. But the cost of repair after buying a
second-hand asset to bring them into proper working
condition is treated as Capitalized Expenditure.
(f) Wages: It is a
revenue expenditure but if paid for installation of
a machine or plant, then it is treated as a
(g) Legal Charges:
Legal charges i.e. lawyer's fee, court fee in
connection with the purchase of asset of permanent
nature are regarded as capital expenditure.
Interest paid is generally a revenue expenditure.
But in some industries like iron & steel, cement
industry etc., a concern has to wait for a long
period before it starts operation. Interest for such
period on capital and loan is treated as capital
above discussion, the distinction between 'deferred
revenue expenditure' and 'capitalized expenditure'
may be noted. The amount of deferred revenue
expenditure is generally heavy and it is spread over
a number of years. But capitalized expenditure is
added in full to the cost of concerned asset,
whatever may be the amount of expenditure. Hence
there is no question of apportioning the expenditure
over a number of years.
State with reasons
whether the following should be considered as
deferred revenue expenditure or capitalized
expenses paid in the formation of a company.
advertisement expenses paid to introduce a new
product in the market.
3. Wages paid for
the installation of a machinery.
4. Carriage paid on
the purchase of a machinery.
5. Cost of
overhauling and painting a second-hand truck
6. Research and
experimental expenses to introduce a new product.
time of formation of a company certain
expenses are incurred which are revenue
by nature e.g. cost of preparing
documents, registration fee, cost of
stamp etc. Such expenditures are large
in amount and it will be logical to
spread such expenditures over a number
ordinarily a revenue expenditure. But if
heavy advertisement expenses are paid to
introduce a new product, then, the
benefit will be received for a number of
years, so it is treated as deferred
Capitalized expenditure or capital
expenditure is regarded as a part of the
cost of machinery, so it is regarded as
a capitalized expenditure.
paid on machinery is also regarded as an
additional cost of the machinery,
therefore, treated as a expenditure.
overhauling and painting is incurred to
bring the second-band truck into proper
working order, so it is regarded as
benefit of this expenditure will be
enjoyed for many years, so it is
regarded as a deferred revenue
deferred revenue expenditure and capitalized
expenditure are shown on the asset side of the