Capital Expenditure and Revenue Expenditure

Capital transactions  

Capital expenditure is expenditure on non-current assets, and capital receipts would result from the disposal of those assets. Other transactions that are regarded as capital transactions are the obtaining of and repayment of non-current finance. Capital transactions initially affect the figures in the balance sheet. Capital transactions are those that affect the organisation in the long term, as well as in the current period

Capital expenditure is the expenditure incurred for acquisition of assets the benefits of which are enjoyed over the years. The benefits of revenue expenditures are exhausted in the year of incurrence. Thus it is seen that utilisation of business capital is made for two distinct purposes:

1) Expenses yielding benefits over the years termed – capital expenditure.

2) Expenditures yielding benefits during the current accounting year – termed as revenue expenditure

Suppose a company incurred an expenditure of Rs. 100000 for advertisement before marketing of a new product

Revenue transactions 

Revenue transactions are those that affect the organisation in the current period. Revenue receipts come from sales, and sometimes in the form of income from investments. Revenue expenditure is expenditure on items that are consumed in the period, for example the running expenses of the organisation, cost of sales, etc. Revenue transactions affect the figures in the income statement.

Examples for Capital Expenditure and Revenue Expenditure

Example 1: 

An agricultural land was purchased for a mill was Rs. 1,00,000. Rs. 1 0 000 was paid for land revenue.

Solution : 

Cost of land amounting to Rs. 1 00 000 will be treated as Capital Expenditure and Land revenue of Rs. 10 000 will be treated as Revenue Expenditure.

Example 2: 

Rs. 50,000 was spent on advertising for the introduction of a new product in the market,the benefit of the market which will be divided for four years.

Solution :

Rs. 50,000 spent on advertising is to be treated as deferred revenue expenditure considering the benefit attributable for four years to come Rs. 12,500 is to be written off every year.

Example 3:

Rs. 10,000 spent as lawyer’s fee to defend a suit claiming that the firm’s factory site belonged to the plaintiff. The suit was not successful.

Solution : 

Rs. 10,000 incurred for defending the title to the firm’s assets is a revenue expenditure. If, however any expenditure incurred for rectifying the title is a capital expenditure.