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Difference between Capital Expenditure and Revenue Expenditure:

Revenue Expenditure Capital Expenditure

1. Its effect is temporary, i.e. the benefit 1. Its effect is long-term, i.e. it is not is received within the accounting year. exhausted within the current accounting year-its benefit is received for a number of years in future. 2. Neither an asset is acquired nor the 2. An asset is acquired or the value of an value of an asset is increased. existing asset is increased. 3. It has no physical existence because it 3. Generally it has physical existence except is incurred on items which are used by intangible assets. the business. 4. It is recurring and regular and it 4. It does not occur again and again. It is occurs repeatedly. nonrecurring and irregular. 5. This expenditure helps to maintain the 5. This expenditure improves the position of business. the business. 6. The whole amount of this expenditure 6. A portion of this expenditure (depreciation is shown in trading P & L A/c or on assets) is shown in trading & P & L A/c income statement. and the balance is shown in the balance sheet on asset side. 7. It does not appear in the balance 7. It appears in the balance sheet until its sheet. benefit is fully exhausted. 8. It reduces revenue (profit) of the 8. It does not reduce the revenue of the business. concern. Purchase of fixed asset does not affect revenue.

Example:
State with reasons whether the fallowing items of expenditure are capital or revenue. (i) Wages paid on the purchase of goods. (ii) Carriage paid on goods purchased. (iii) Transportation paid on machinery purchased. (iv) Octroi duty paid on machinery. (v) Octroi duty paid on goods. (vi) A second-hand car was purchased for $7,000 and $5,000 were spent for its repairs and overhauling. (vii) Office building was whitewashed at a cost of $3,000. (viii) A new machinery was purchased for Rs.80,000 and a sum of Rs.1,000 was spent on its installation and erection.

(ix) Books were purchased for $50,000 and $1,000 were paid for carrying books to the library. (x) Land was purchased for $1,00,000 and $5,000 were paid for legal expenses. (xi) $50,000 were paid for customs duty and freight on machinery purchased fromJapan. (xii) Old furniture was repaired at a cost of $500. (xiii) An additional room was constructed at a cost of $15,000. (xiv) Damages paid on account of the breach of contract to supply certain goods. (xv) Cost of replacement of an old and worn out part of machinery. (xvi) Repairs to a motor car met with an accident. (xvii) $10,000 paid for improving a machinery. (xviii) Cost of removing plant and machinery to a new site. (xix) Cost of acquiring the goodwill of an old firm. (xx) Cost of redecorating a cinema hall. (xxi) Cost of putting up a. gallery in a cinema hall. (xxii) Compensation paid to a director for loss of his office. (xxiii) Premium paid on the redemption of debentures. (xxiv) Costs of attending a mortgage. (xxv) Commission paid on issue of debentures. (xxvi) Cost of air-conditioning the office of the director of a company. (xxvii) Repairs and renewal of machinery. (xxviii) Cost of acquiring patent rights and trade marks. (xxix) Compensation paid to workers for termination of their services. (xxx) Compensation paid to a person injured by company's car. (xxxi) Expenditures incurred on alteration in windows ordered by municipal authorities. (xxxii) Painting expenditures of a newly-constructed factory. (xxxiii) Expenditures incurred on renewal of patent. (xxxiv) Expenditures on replacement of a slate roof by a glass roof.

(xxxv) $10,000 spent on dismantling, removing and reinstalling machinery and fixtures. (xxxvi) legal expenses incurred in an income tax appeal.

Solution:
Sr. No. Wages A/C is debited. (i) Nature of Expenditure Revenue expenditure Reasons Wages paid on goods purchased and a revenue expenditure because goods purchased are meant for resale. It is recurring by nature as goods are purchased repeatedly in a business. The carriage paid on purchases is a revenue expenditure because goods purchased are meant for resale and whenever goods are purchased carriage is paid to bring the goods to the godown of the business. A machinery purchased is useless until it is brought to the business. As machinery is a fixed asset and transportation paid is an additional cost to the machinery, so it is a capital expenditure. Octroi duty paid on machinery is also an additional cost to the machinery, If it is not paid, the machinery cannot be taken to the business, so it is a capital expenditure. Octroi duty paid on goods is a revenue expenditure because goods mean saleable goods. It is recurring and is paid repeatedly whenever goods are purchased. A second-hand car is a fixed asset as it "can be used for many years and its utility does not diminish in one year, so it is a capital expenditure. But it is useless if it is not made good to work, so the amount spent on its repair and overhauling is also a capital expenditure. Whitewashing of a building is necessary for its maintenance and because of this expenditure the profit earning capacity of the business has not increased, so it is a revenue expenditure. Machinery is a permanent asset of the business and can be used for many years but it will benefit to the business until it is installed and erected at a proper place. So amount spent on purchase of machinery, on its installation and erection is capital expenditure. Fixed asset "Books" has been acquired and can be used for many years. Cost of carrying books is regarded as a part of purchase price

Carriage A/c is debited.

(ii)

Revenue expenditure.

Machinery A/c is debited instead of transportation A/c. Machinery A/c is debited instead of octroi duty A/c Octroi duty A/c is debited.

(iii)

Capital expenditure.

(iv)

Capital expenditure.

(v)

Revenue expenditure.

For both expenditures motor car A/C is debited

(vi)

Capital expenditure.

White washing A/c is debited.

(vii)

Revenue expenditure.

Machinery A/c debited for all expenditure.

(viii)

Capital expenditure.

For bath expenditures Books

(ix)

Capital expenditure.

A/c is debited. Land A/c is debited. Machinery A/c is debited. (x) Capital expenditure. Capital expenditure.

of the books, so it is a capital expenditure. Land purchased is a fixed asset. All expenses' connected with its acquisition are regarded as a part of its purchase price. Machinery is a fixed asset. All expenses connected with its import from Japan are regarded as a part of its purchase price, So it is capital expenditure. Value of furniture does not increase as a result of its repair -- it is simply kept in a proper working condition. This is an addition to a fixed asset and as a result of this expenditure the value of the building has increased, so it is a capital expenditure. In this case the goods have not been supplied by the business to the customer according to the contract between them. The customer claimed damages which the business paid. It is a usual thing that happens in ordinary course of trading, so it is a revenue expenditure. A worn out part of the machinery is simply the cost of repair and maintenance of fixed asset. The value and profit earning capacity of the machinery has not increased in any way, so it is a revenue expenditure. Cost of repair to a motor car does not increase the value of the car, it is simply incurred to put back the car into working condition, so it is a Revenue expenditure. Cost has been incurred to 'improve (h machinery. It increases the value and profit earning capacity of the machinery, so it is capital expenditure. Plant and machinery have been removed to a new site in order to increase their profit-earning capacity, so cost of removal is a capital expenditure. Goodwill is an intangible asset and it will benefit to the business for many years. So cost of acquiring goodwill (using the name of an old firm) is always a capital expenditure. Generally a cinema hall is decorated regular and redecorating cost is a recurring expenditure Moreover, it will not add to the capacity of the hall, so it is a revenue expenditure. As a gallery has been put up in the cinema hall, it increases the capacity of the hall, which in turns enhances the profit-earning capacity of the business, therefore, the cost is treated as a capital expenditure. Compensation paid to the director of a

(xi)

Repair A/c is debited.

(xii)

Revenue expenditure.

Building A/c is debited.

(xiii)

Capital expenditure.

Damages A/c or general expenses is debited.

(xiv)

Revenue expenditure.

Repair and maintenance A/c is debited.

(xv)

Revenue Expenditure.

Repair to car A/c is debited.

(xvi)

Revenue Expenditure

Machinery A/c is debited. Plant and , Machinery A/c is debited. Goodwill A/c is debited.

(xvii)

Capital expenditure. Capital expenditure. Capital expenditure.

(xviii)

(xix)

Re-decoration 'A/c or Maintenance A/c is debited. Cinema hall A/c or Building ' debited.

(xx)

Revenue expenditure.

(xxi)

Capital expenditure.

Expense A/c is

(xxii)

Revenue

debited.

expenditure.

company ,for the loss of his office is a revenue expenditure because the company will get the benefit of this expenditure only for one year. By issuing debentures, money is borrowed from the public for a long period of time and is used in the purchase of fixed assets or on the expansion of the business, therefore, premium paid is a capital expenditure. Mortgage means a deed showing that the money has been borrowed (loan raised) by mortgaging assets as collateral security. The assets will remain mortgaged with the lender until the loan has been repaid. So the assets have been utilized for raising loan and the costs attending the mortgage is, therefore, a capital expenditure. Debentures are considered as borrowed capital and are used for the acquisition of fixed assets such as machinery etc., therefore, commission paid on issue of debentures is a capital expenditure. By making the office of the director, airconditioned, the efficiency of the director will increase and it will last for many years, so cost of air-conditioning is a capital expenditure. Annual repair and renewal of machinery is necessary to keep it in a proper working condition, therefore, this expenditure is considered as a revenue expenditure. Patents and trade marks are intangible assets, the benefit of, which is received for many years, so cost of acquiring these assets is a capital expenditure. By terminating inefficient workers, the business will run more economically and profit-earning capacity of the business will increase, so compensation paid to them is a capital expenditure. It happened in the ordinary course of business, so, compensation paid to the injured person is a revenue expenditure. This expenditure will add nothing to the value of the building and will have no effect on the profit-earning capacity of the business, so it is a revenue expenditure. Amount spent on painting a new factory is regarded as a part of the cost of factory building, therefore, it is a capital expenditure. If patent is renewed annually, then it is a revenue expenditure as it has been incurred in the ordinary course of business.

(xxiii)

Capital expenditure.

(xxiv)

Capital expenditure.

(xxv)

Capital expenditure.

(xxvi)

Capital expenditure.

Repair A/c is debited.

(xxvii)

Revenue expenditure.

(xxviii) Capital expenditure.

(xxix)

Capital expenditure.

(xxx)

Revenue expenditure. Revenue expenditure.

(xxxi)

(xxxii)

Capital expenditure.

(xxxiii) Revenue Expenditure.

(xxxiv) Capital expenditure. (xxxv) Revenue Expenditure

As a slate roof is replaced by a glass roof, it will increase the efficiency of the building and therefore, it is a capital expenditure. Amount of $10,000 spent on dismantling removing and re-installing machinery an fixtures will be treated as revenue expenditure. may be treated as deferred revenue expenditure item and spread over a number of years. This expenditure has been incurred in the ordinary course of the business being expense o carrying on the business, therefore, it is a revenue expenditure.

(xxxvi) Revenue Expenditure

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Definition of 'Internal Rate Of Return - IRR'


The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

IRR is sometimes referred to as "economic rate of return (ERR)".

Investopedia explains 'Internal Rate Of Return - IRR'


You can think of IRR as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth. IRRs can also be compared against prevailing rates of return in the securities market. If a firm can't find any projects with IRRs greater than the returns that can be generated in the financial markets, it may simply choose to invest its retained earnings into the market.
Read more: http://www.investopedia.com/terms/i/irr.asp#ixzz1jWZ5sRgX