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Home Capital and Revenue Items Principles for making distinction between Capital Expenditure and Revenue Expenditure

Principles for making distinction between Capital Expenditure and Revenue Expenditure:

We have no hard and fast rule for distinguishing capital expenditure from revenue expenditure because, the same item of expenditure may be treated as capital, revenue or deferred revenue depending upon the circumstances.

For example, to a machinery dealer purchase of machinery is a revenue expenditure, while machinery purchased for manufacturing goods is a capital expenditure. In the same way, wages are generally a revenue expenditure, but wages paid for the installation and erection of a machinery is a capital expenditure. However, generally the following principles are followed to make a distinction between capital expenditure and revenue expenditure.

1. Any expenditure that benefits the business for several accounting years, is regarded as a capital expenditure; any expenditure that benefits the business only for one accounting year is considered a revenue expenditure.
2. Any expenditure which is not incurred repeatedly and regularly (non-recurring) is a capital expenditure, while any expenditure which is incurred again and again (recurring ) is a revenue expenditure e.g., motor car is not bought again and again, but petrol required to drive it is to be bought at regular intervals.
3. Any expenditure incurred to improve the concern or to increase the profit-earning capacity of the concern is a capital expenditure. On the other hand, expenditure incurred to keep the activities of a concern going, is revenue expenditure.
4. Expenditure incurred after buying second-hand asset to bring it into proper working order is a capital expenditure.
5. Expenditure incurred on the purchase and installation of a new asset is regarded as capital
6. 6. Any expenditure incurred on the extension or addition to an existing asset is considered as a capital expenditure.

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




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