Fundamentals of Accounting – Capital and Revenue Expenditure

Capital and Revenue Expenditure

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.The benefit of such expenditure lasts for a long period of time.Purchases of land, buildings, machinery, furniture, patents, etc, fees paid to lawyer for drawing a purchase deed of land, overhauling expenses of second
hand machinery, cartage paid for bringing machinery to the factory from supplier’s premises and money spent to install a machinery

2) Expenditures yielding benefits during the current accounting year – termed as revenue expenditure
Where the benefits of a revenue expenditure are extended beyond the accounting year of incurrence it is called a differed revenue expenditure.

Suppose a company incurred an expenditure of Rs. 100000 for advertisement before marketing of a new product. If the whole amount is charged in the current year, the profit of the company would not reflect a true picture as the benefits are likely to spread over three to four years. So 1/3 or 1/4 of the expenditure will be charged to current P/L Account
and the balance should be carried forward for remaining years. This will be shown on the assets side of the balance sheet as deferred revenue expenditure.

Expenses whose benefit expires within the year of expenditure and which are incurred to maintain the earning capacity of existing assets are termed as revenue expenditure. Amounts paid for wages, salary, carriage of goods, repairs, rent and interest, etc., are items of revenue expenditure. Depreciation on fîxed assets is also a revenue expenditure.

Difference Between Capital Expenditure and Revenue Expenditure

(I) Capital expenditure is incurred in acquiring or improving permanent assets which are not meant for resale. But revenue expenditure is a routine expenditure incurred in the normal course of business and includes cost of sales as also the upkeep of fixed assets etc.

(ii) Capital expenditure seeks to improve the earning capacity of the business whereas revenue expenditure is incurred to maintain the earning capacity of the business.

(iii) Capital expenditure is normally a non-recurring outlay but revenue expenditure is usually a recurring item.