Capital Expenditure

Capital Expenditure The expenditure which are not fully consumed within an accounting period or which increase the earning capacity or decrease the future cost and as a result, increase the profit of the business. These expenditure are non recurring in nature e.g. Cost of goodwill, Land and Building, furniture and fixtures, patents, additions to or extension of existing asset, improvement of fixed asset, overhauling of second hand machines, development of mines and plantation etc.

Revenue Expenditure

 The

expenditure which are incurred for running the business or day to day conduct of business in one accounting period and the benefit of which is consumed in the same accounting period. Direct and indirect expenditure incurred for production, selling, distribution, administration etc., depreciation of fixed asset, theft or damages by accident and bad debt or payment of some compensation to workers or outsiders during the course of business, interest on borrowed fund or expenses incurred for maintenance of fixed assets.

Capital Receipt

 These

receipts are earned by way of selling of fixed asset or in connection with raising capital for the business. E.g. Sale of fixed asset, issue of shares, loan taken etc. These receipts are non recurring in nature because they are not regularly earned.

Revenue Receipt

 Revenue

receipts are the receipts earned during the ordinary course of business. They are recurring in nature.

These

receipt will increase the profit of the firm E.g. Discount Received, comm. received. etc

Capital Profit or loss

 A profit

or loss arises by sale of Asset it is called capital profit or loss.

E.g.

sold motor cycle worth Rs. 35000 for Rs. 25000 Rs. 10000 is called capital loss.

Revenue loss

loss arises by sale of stock in less price is called Revenue loss. More e.g. loss of goods by theft, fire

Deferred Revenue Expenditure

 DRE

are those expenditure which are not recurring in nature or the benefit of which is not for the long term. This is neither revenue nor capital. E.g. Huge advertisement Expenditure , Preliminary Expenditure, discount on issue of shares, brokerage or commission paid on issue of shares, debentures etc.

 Customs

duty paid Rs 5000 on import of machinery. Expenditure: because the import duty paid in connection with the purchase of new fixed asset and hence it is also to be capitalized.

Capital

 Repairing

expenses Rs 5000 before putting to use a second hand car purchased. Expenditure: because any repairs made to any asset immediately on purchase and before it is put to use are considered as capital expenditure and added in the value of assets. These repairs are incidental to the purchase of car.

Capital

 Rs

4300 paid for replacing a worn out part of a machine with the new part. Expenditure: because it is incurred for keeping the asset in working condition. It does not lead to any addition in fixed assets nor does it enhance the earning capacity above the existing level.

Revenue

 Amount

of Rs 500 paid for repairs of existing plant. Expenditure: Any expenditure for repairs on the existing asset is considered as revenue expenditure.

Revenue

 An

amount of Rs 15000 paid for replacing petrol driven engine with diesel engine. expenditure: As the petrol driven engine is replaced with the diesel driven engine, it will enhance operating efficiency and also reduce operating cost.

Capital

 Rs

800000 paid for the advertisement for launching a new product in to the market. The benefit of such advertisement will be accrued for 4 to 5 years. Deferred revenue expenditure: Heavy advertisement made for launching of a new product will benefit for long period of time but it dos not lead to addition in fixed assets.

 White

washing of a factory.

Revenue

Expenditure: It is a yearly activity of maintenance of a factory through white washing. Its benefits exhausts in a year.

 Heavy

amount of Rs 100000 paid for preparing a project report for implementing a new project. If an amount is spent on preparation of new project report and such project is successfully implemented then such expenditure is considered as capital expenditure and added in the cost of such project. But if the project fails then such expenditure is considered as deferred revenue expenditure (loss) and left to be written off over a certain number of years.

 Interest

on a term loan for purchase of machinery. The commercial production has not begun till the last date of a year. Expenditure: As the production has not yet begun in the concerned accounting year, interest on term loan for machinery should be capitalized.

Capital

 Interest

on a term loan for purchase of machinery. The commercial production has already begun. Expenditure: As the production has already begun, the interest on loan for machinery is considered as revenue expenditure.

Revenue

 Amount

of Rs 10000 received from cash sales. Receipt: Making sale is regular business activity and hence it is revenue receipt.

Revenue

 Loan

taken Rs 144000.

Capital

Receipt: Loan taken leads to increase in fixed liability hence such receipt is capital receipt.

 Collection Revenue

from debtors Rs 20000.

Receipt: Collection from the debtors is against credit sales made to them and hence such collection is considered as revenue receipt.

 Issued

10000 shares of Rs 20 at a premium of Rs 2 per share. Receipt: Issue of shares also leads to the increase in the fixed liability and hence it is capital receipt.

Capital

 Debentures

issued Rs 100000. Issue expenses Rs 6000 Receipt: Debenture issue leads to increase in fixed liability hence it is capital receipt and expenses for issue of debentures is deferred revenue expenditure.

Capital

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