R.M.I.

Capital and Revenue ExpenditurePresented by -

1. 2. 3. 4. 5.

Dheeraj Seth Divya Sanjiva Gaurav Advani Girish Patel Hanoze Malesra

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RIZVI MANAGEMENT INSTITUTE

CAPITAL & REVENUE EXPENDITURE

Expenditure The use of goods and services in order to earn revenue is the expense. Hendriksen opines, "expenses are the using or consuming of goods and services in the process of obtaining revenues". "Expense is the expired cost, directly or indirectly related to given fiscal period, of the flow of goods or services into the market and of related operations."

Expenditure Expenditure incurred during the fiscal period and related to same accounting period becomes an expense i.e. expired cost of that period. Expenditure incurred during the previous accounting period but related to current accounting period becomes an expense i.e. expired cost of the current accounting period e.g. prepaid expenses. Expenditure related to the current accounting period but not paid becomes outstanding expenses.

Expenditure Expenditure is usually of two types:

(a) Capital expenditure; and (b) Revenue expenditure.

Capital and Revenue Expenditures

Increases operating efficiency or adds to capacity?

Capital Expenditure (Debit fixed asset account)

Capital and Revenue Expenditures

Increases operating efficiency or adds to capacity?

Increases useful life (extraordinary repairs)?

Capital Expenditure (Debit fixed asset account)

Capital and Revenue Expenditures

Increases operating efficiency or adds to capacity?

Increases useful life (extraordinary repairs)?

Revenue Expenditure (Debit expense account for ordinary maintenance and repairs)

Capital Expenditure (Debit fixed asset account)

Capital and Revenue Expenditures

CAPITAL EXPENDITURES

ASSETS

1. Initial cost 2. Additions 3. Betterments 4. Extraordinary repairs

Capital and Revenue Expenditures

CAPITAL EXPENDITURES

ASSETS

REVENUE EXPENDITURES

EXPENSES

Normal and ordinary repairs and maintenance

Key words indicating Capital expenditureEnhance Upgrade Extend Improve

Key words indicating Revenue expenditureRepair Maintain Replace Like-for-like Remedial Renew

Capital Expenditure Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods. It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset. These are not meant for sale. Expenditure incurred for improving assets and extending an existing asset is also capital expenditure.

Capital Expenditure The sum of invoice price, freight and insurance charges, installation and erection cost and custom duty etc. will be capitalized in the books of a firm. These capital items appear on the assets side of Balance Sheet.

Capital Expenditure - Examples Interest on capital paid during the period of construction of Company (u/s 208 of Indian Companies Act) Expenditure in connection with or incidental to the purchase or installation of an asset. Acquisition of new assets. Expenditure incurred for putting the old asset purchased, into working condition. Additions and extensions to existing assets. Interest and financing charges paid, brokerage and commission paid. Betterment of fixed assets or improvement of an asset to produce more, to improve its earning capacity or to reduce its operating expenses or to increase the life of asset.

Capital Expenditure - Examples The cost of assets will be written off by way of depreciation over a period of its life. The amount of depreciation is a revenue expenditure and is debited to profit and loss account. The reason for charging depreciation to revenue i.e. profit and loss account is that the asset is used for earning revenue. Hence the depreciation is charged to profit and loss account. Thus, the benefit of capital expenditure does not exhaust in one year but extends over a number of years of its use or life of the asset.

Revenue Expenditure Revenue expenditure consists of expenditure incurred in one period of the accounting, the full benefit of which is enjoyed in that period only. This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning capacity of the business. It includes all expenses which arise in normal course of business. The benefit of such expenditure is for a short period, say, one year only and it is not to be carried forward to the next year. The expenditure is of a recurring nature i.e. incurred every year.

Revenue Expenditure - Examples Purchase of raw materials for conversion into finished goods. Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, et(% Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment. Depreciation of plant, machinery and equipment. Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such' as repairs to building, repairs to plant, white-washing and painting of building.

Revenue Expenditure All these items appear on the debit side of trading and profit and loss account, in case of trading concerns or income and expenditure account, in case of non-trading concerns.

Deferred Revenue Expenditure Deferred Revenue Expenditure is a revenue expenditure which has been incurred during one accounting year which is applicable either wholly or in part to further accounting years. According to Prof. A.W. Johnson, "Deferred Revenue Expenditure includes those nonrecurring expenses, which are expected to be of financial nature, distributed to several accounting periods of indeterminate total length. These are of revenue nature but are deferred or postponed. It is of quasi- capital nature."

Deferred Revenue Expenditure Deferred Revenue Expenses are those expenses, the benefit of which may be extended to a number of years, say, 3 to 5 years. These are to be charged to profit and loss account, over a period of 3 to 5 years depending upon the benefit accrued.

Deferred Revenue Expenditure Sometimes losses may be suffered of an exceptional nature e.g. loss of an asset (uninsured) due to accident or fire; confiscation of property in a foreign country etc. the amount which has not been debited to the profit and loss account of the current year is shown in the balance sheet on the assets side and it is known as fictitious asset.

Purpose of Distinction Profit and Loss Account is debited with revenue expenditure and credited with revenue income (i.e. sales income and from other sources). If the revenue income is higher than revenue expenditure, it will be a profit and if it is less than revenue expenditure, it will be a loss. Capital expenditure is shown on the assets side of Balance Sheet. Capital and liabilities are shown on the liabilities side of Balance Sheet. The purpose of distinction is to give "True and fair" view of the accounts and financial position of the firm.

Capital expenditure is treated as revenue expenditure Value of fixed asset is understated Net profit is understated

Revenue expenditure is treated as capital expenditure Revenue expenditure is treated as capital expenditure Value off Fixed asset is overstated Net profit is overstated

Some Question-Answer round

Is this Capital or Revenue Expenditure?

InventoriesRevenue Expenditure

Is this Capital or Revenue Expenditure?

Office EquipmentCapital Expenditure

Is this Capital or Revenue Expenditure?

SalariesRevenue Expenditure

Is this Capital or Revenue Expenditure?

New factoryCapital Expenditure

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