Revenue Expenditure becoming Capital Expenditure
Following are some of the circumstances under which an expenditure which usually’ of a revenue nature may be taken as an expenditure of a capital nature:
I. Repairs. The amount spent on repairs of plant, furniture, building, etc., is taken as a revenue expenditure. However, when some second-hand plant, motor car, etc., is purchased, the expenditure incurred for immediate repairs of such plant, motor car, etc., to make it fit for use will be taken as a capital expenditure.
2. Wages. The amount spent as wages is usually taken as a revenue expenses. However, amount of wages paid for erection of a new plant or machinery or wages paid to workmen engaged in construction of a fixed asset are taken as expenditure of a capital nature.
3. Legal charges. Legal charges are usually taken as expenditure of a revenue nature, but legal charges incurred in connection with purchase of fixed assets should be taken as a part of the cost of the fixed asset.
4. Transport charges. Transport Charges are generally of a revenue nature, but transport charges incurred for a new plant and machinery are taken as expenditure of a capital nature and are added to the cost of the asset.
5. Interest on capital. Interest on Capital paid during the construction of works or buildings or plant may be capitalised and thus added to the cost of the asset concerned.
6. Raw materials and stores. They are usually taken as of a revenue nature, but raw materials and stores consumed in construction of the fixed assets should be treated as capital expenditure and be taken as a part of the cost of such fixed asset.