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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.

incurred in bringing the goods purchased to the place of business are revenue expenditure. rent. amount spent on a tea estate or rubber estate before.. In other words. (b) Expenses. (d) Expenses incurred in manufacturing goods for resale are revenue expenditure. postage and telegrams. law charges. For instance . These expenses are recurring in nature.. commission paid. (h) Interest on loan borrowed. it has started yielding is a capital expenditure. e. such as carriage. discount allowed.. i. wages. replacements and renewals of fixed assets.g.. etc. etc. e.(g) Development expenditure (i.. amount spent on an asset before it has started yielding) is a capital expenditure. (f) Expenses incurred for selling the products are revenue expenditure.g. (g) Any expenditure which is incurred for maintaining the fixed assets in good working order or condition is revenue expenditure. (c) Cost of material consumed in the manufacture of goods for meant for resale is revenue expenditure. e.. carriage outward. insurance. interest on deposits accepted. REVENUE EXPENDITURE: An expenditure that arises out of and in the course of regular business transactions of a concern is termed as revenue expenditure. printing and stationery. factory heating. repairs. bad debts. freight. bank charges. DIFFERENCES BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE .g. factory rent. Following are few examples of revenue expenditure: (a) Cost of goods purchased for resale is revenue expenditure. etc. salaries.e.e. are revenue expenditure. power. advertisement.. etc. interest on capital. 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. (e) Expenses incurred for the day-to-day management of the business are revenue expenditure. etc.

4. The benefit of revenue Capital expenditure will expenditure is confined to only increase the value of net assets. Capital expenditure adds to the revenue earning capacity of a concern. one year. No. 5. and Account. 1. 7. REVENUE EXPENDITURE Revenue expenditure is incurred for acquiring or producing goods meant for sale.S. Revenue expenditure is incurred for maintaining the fixed assets in a good working order. Revenue expenditure is Capital expenditure is nonrecurring. Revenue expenditure will go to Capital expenditure will go to the Trading Account or Profit the Balance sheet. However. recurring. 6. 3. and not for resale. 2. CAPITAL EXPENDITURE Capital expenditure is incurred for acquiring fixed assets intended for use in the business. amount of wages and salaries paid for the erection of a new plant or machinery or wages paid to workman engaged in . WHEN REVENUE EXPENDITURE BECOMING CAPITAL EXPENDITURE Following are some of the circumstances under which an expenditure which is usually of revenue nature may be taken as an expenditure of a capital nature: (1) WAGES AND SALARIES: The amount spent as wages and salaries generally taken as a revenue expenses. one year. Revenue expenditure does not add to the revenue earning capacity of a concern. The benefits of capital Revenue expenditure will expenditure extend to more than decrease the value of net assets. Capital expenditure is incurred for extending or improving the existing fixed assets.

(6) DEVELOPMENT EXPENDITURE: In case of some business such as tea. 10. However. if a building costing Rs. (3) REPAIRS: The amount spent on repairs of plant. once they begin to earn. CLASSIFICATION OF INCOME OR PROFIT Income can be classified into two categories viz: (1) Capital income or Profit (2) Revenue income or Profit (1) Capital income: The term ‘capital income’ means an income which does not a pertain to the running of the business proper. However.construction of fixed assets are taken as expenditure of a capital nature. building. motorcar etc. plantations. (5) RAW MATERIALS AND STORES: They are usually taken as of a revenue nature. but raw materials and stores consumed in construction is the fixed assets should be treated as capital expenditure and be taken as a part of the cost of such fixed assets. a long period is required for development. is purchased. mines. The expenditure incurred during such periods is termed as development expenditure and may be treated as a capital expenditure. For example. the expenditure incurred for immediate repairs of such plant. is taken as revenue expenditure. horticulture etc. (4) LEGAL EXPENSES: Legal expenses are usually taken as expenditure of a revenue nature but legal expenses incurred in connection with purchase of fixed assets should be taken as a part of the cost of fixed assets. They start earning only after expiry of a long period which can be termed as development period. furniture. when some second hand plant. rubber. (2) CARRIGE IN: Carriage charges are usually of a revenue nature but carriage charges incurred for a new plant and machinery are taken as expenditure of a capital nature and are added to the cost of asset. the expenditure incurred to maintain them will be revenue expenditure. to make it fit for use will be taken as a capital expenditure. etc. motor-car etc.000 purchased by a business for its use is .

(f) Non-recurring receipts. in the course of running the business. income is received from letting on the business property etc. such as interest and dividends received on securities.000. (h) Sale proceeds of old newspapers.sold for Rs. (2)Revenue receipts: Revenue receipts are receipts which are of recurring nature (i. RS.. the profit is made of sale of goods. legacies. CLASSIFICATION OF RECEIPTS Receipts can be classified into two categories viz: (1) Capital Receipts (2) Revenue Receipts (1) Capital receipts: Capital receipts are receipts which are of nonrecurring nature (i. such as life membership fees. furniture. (e) Amounts received by way of loans. (f) Commission received. (2) Revenue income: Revenue income means an income which arises out of and in the course of the regular business transactions of a business. They include : (a) Capital received from proprietor or proprietors of the concern. . (b) Sale proceeds of old packing cases. They include: (a) Sale proceeds of goods.e. (c) Sale proceeds of investments. etc. For example. (e) Interest on bank deposits. buildings. All such incomes are revenue incomes or profit. motor vehicles. receipts which are not regular).. such as lands. 5. (b) Amounts received by way of deposits. received by a non-trading concern.. receipts which are received repeatedly or regularly).000 WILL BE TAKEN AS CAPITAL INCOME OR PROFIT. machinery. etc. 15. (g) Rent received. (c) Incomes from investments. (d) Sale proceeds of fixed assets. (d) Interest received on loans granted.e.

sale proceeds of investments and fixed assets and non-recurring receipts. 3 4 5 6 Revenue receipts are of recurring Capital receipts are of nonnature. Revenue receipts are not liabilities.DISTINCTION BETWEEN CAPITAL RECEIPTS AND REVENUE RECEIPTS S.e. interest received. life membership fees. Revenue receipts will go to the profit Capital receipts will go to the & loss a/c of the concern. such as loans and deposits received is liabilities. loans or deposits received. commission received. etc. they are recurring nature. As revenue receipts are not As some of the capital receipts liabilities. such as sale proceeds of goods. they are not received repeatedly (i. they need not be repaid. etc. In other words. again and again). balance sheet of the concern.. to the concern. Revenue receipts are incomes to the Capital receipts are not incomes concern. Some of the capital receipts. In other words. received repeatedly or regularly. . 2 REVENUE RECEIPTS Revenue receipts represent the incomes.NO CAPITAL RECEIPTS 1 Capital receipts represent the capital received from the proprietors. they have to be repaid. such as legacies. are liabilities.