Unit - 4By Radhika

Faculty Member J.H.Bhalodia Women’s College

Capital and Revenue Expenditure

All exp. and receipts of a business can broadly be divided into two groups, viz. Capital and Revenue eg. Salary, rent, etc. are revenue expenses and expenses on purchase of machinery and its erection charges are capital exp.

In preparing Final a/c….. Posting of these two will be… Distinction between these to should be clearly understood

else it will falsify the a/c Repairs to building is revenue exp. & if not treated as

revenue exp. And not charged to P & L a/c then the profit disclosed would be more then actual one.

Similarly money spent on purchase of furniture is a capital exp.

Cont.

If revenue exp. is treated as capital and would not charged to P & L a/c, the profit shown in P & L a/v will be more and dividend paid out of such profit would be treated as dividend paid out of capital.

Hence it is of prime importance to correctly allocate the exp.

Capital Expenditure

Any exp. Which is incurred for increasing earning capacity of the business is capital exp.

An exp. Which results in the acquisition of an asset to be used in the busi. is also capital exp.

Money spent on purchasing fixed assets Installation of the assets Money spent on putting the assets acquired into working

condition eg. Repairs to old machinery purchased Exp occurred at the time of purchase eg. legal charges,

stamp fees and brokerage

Chracteistics

Not Recurring in nature

Results in the acquisition of assets in permanent nature

Busi. Get benefits for a long duration

Used for the purpose of earning revenue

Revenue Expenditure

Exp incurred in running the busi. and in maintaining the earning capacity of the business are considered as Revenue exp.

Such exp. Of recurring nature eg. Salary and rent have to be paid every month

Similarly exp of maintaining the assets in efferent working conditions which does not increase the earning capacity eg. Repairs and renewal of machinery

Cont.

Cost of raw materials or stores consumed in manufacture Manufacturing exp. Eg. Wages Admin. Exp of busi. Eg. Salary, postage, printing and

stationery Selling and distribution exp. Eg. Advertising,commission Exp of financial nature. Eg. Inerest on loan, BOD Repairs and maintance exp. Depreciation on assets.

Differed Revenue Expenditure

The exp. Which is primarily of revenue nature benefit where of is not exhausted in the year in which it is incurred are known as Deferred Revenue Expenditure.

Such exp. are not charged to revenue in the year in which they are incurred, but a part of such exp. is written off every year and the balance is temporarily capitalized and is shown in the Balance sheet till it is completely written off.

Eg. Advertising, preliminary exp., discount on shares and debentures