1. CAPITAL AND REVENUE EXPENDITURE/INCOME
CLASSIFICATION OF EXPENDITURE
Expenditure can be classified into three categories:
(1) Capital Expenditure
(2) Revenue Expenditure
(3) Deferred Revenue Expenditure
(1) Capital expenditure: Capital expenditure is that expenditure
which result in acquisition of an asset and can later be sold and
converted into cash or which results in an increase in the
earning capacity of a business. Another test of a capital
expenditure is that the benefit of such expenditure lasts for a
long period of time.
Following are some of the examples of capital expenditure:
(a) Cost of fixed or permanent assets, such as lands, buildings,
machinery, patent rights, vehicles, furniture, loose tools, etc.,
purchased for use in business are capital expenditure.
(b) Cost of additions or extensions to existing fixed assets, such as
costs of addition to machinery, costs of extensions to buildings,
etc., are capital expenditure.
(c) Any expenditure incurred in connection with the acquisition,
(i.e., purchase) of fixed assets is a capital expenditure. For
example, legal charges and brokerage paid for acquiring land
and buildings are capital expenditure.
(d) Any expenditure incurred in bringing the assets purchased to
the business is a capital expenditure. For example, carriage or
freight paid for bringing the machinery purchased is a capital
expenditure.
(e) Any expenditure incurred in installing the fixed assets is a
capital expenditure. For example, charges incurred on the
erection of machinery or charges incurred in the fixing of fans
are capital expenditure.
(f) Any expenditure incurred on the alternations and
improvements of existing fixed assets so as to increase their
income earning capacity is treated as a capital expenditure.
For example, a large amount spent on a useless machine so as
to make useful is treated as capital expenditure because it
increases the revenue earning capacity of the fixed asset.
2. (g) Development expenditure (i.e., amount spent on an asset before
it has started yielding) is a capital expenditure. For instance ,
amount spent on a tea estate or rubber estate before, it has
started yielding is a capital expenditure.
REVENUE EXPENDITURE: An expenditure that arises out of and in
the course of regular business transactions of a concern is termed as
revenue expenditure. In other words, 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.
These expenses are recurring in nature. Following are few examples of
revenue expenditure:
(a) Cost of goods purchased for resale is revenue expenditure.
(b) Expenses, such as carriage, freight, etc., incurred in bringing the
goods purchased to the place of business are revenue expenditure.
(c) Cost of material consumed in the manufacture of goods for meant
for resale is revenue expenditure.
(d) Expenses incurred in manufacturing goods for resale are revenue
expenditure, e.g., wages, power, factory rent, insurance, factory
heating, etc.
(e) Expenses incurred for the day-to-day management of the business
are revenue expenditure, e.g., salaries, rent, law charges, bank
charges, printing and stationery, postage and telegrams, etc.
(f) Expenses incurred for selling the products are revenue
expenditure, e.g., advertisement, commission paid, carriage
outward, bad debts, etc.
(g) Any expenditure which is incurred for maintaining the fixed
assets in good working order or condition is revenue expenditure,
i.e., repairs, replacements and renewals of fixed assets.
(h) Interest on loan borrowed, interest on deposits accepted, interest
on capital, discount allowed, etc., are revenue expenditure.
DIFFERENCES BETWEEN CAPITAL EXPENDITURE AND
REVENUE EXPENDITURE