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Capital Expenditures:

Learning Objectives: 1. Define and explain capital expenditures Expenditure means the amount spent. Any expenditure incurred for the following purposes iscapital expenditure: 1. For acquiring fixed assets such as land, building, plant and machinery, furniture and fitting and motor ehicles. !hese assets should not be acquired with a iew to resell them at a profit but to retain in the business. !he cost of fixed asset would include all expenditure up to the asset becomes ready for use. ". For ma#ing impro ement and extensions to the fixed asset e.g., additions to buildings. $. For increasing the earning capacity of a business or for reducing the cost of manufacture, administration or distribution in a business e.g., expenditure incurred in remo ing the business to a central locality or compensation paid to retrenched employee. %. For raising capital monies for the business such as bro#erage paid for arranging loans, discount on issue of shares and debentures, underwriting commission etc. All capital expenditures represent either an asset or liability and are shown in the balance sheet.

List of Capital Expenditures - (Examples of Capital Expenditures):


!he following is a list of the usual items of capital expenditures: &ost of goodwill. &ost of freehold land and building and the legal charges incurred in this connection. &ost of lease. &ost of machineries, plants, tools, fixtures, etc. &ost of trade mar#s, patents, copy rights, designs, etc. &ost of car, lorry etc. &ost of installation of lights and fans. &ost of any other assets acquired by way of equipment. Erection cost of plant and machinery. &ost of addition to existing assets. 'tructural impro ements and alteration in the existing assets.

Expenses for de elopments in case of mines and plantations. Expenses for administration incurred during construction and equipment of any industrial enterprise. Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights.

Revenue Expenditures:
Learning Objectives: 1. Define and explain re enue expenditures

Definition and Explanation:


Expenditures will be treated as revenue expenditures if it is incurred for the following purposes: 1. Expenditure for purchasing floating assets i.e., assets meant for resale at a profit or for being con erted into saleable goods, such as the cost of goods, raw materials and stores. ". Expenditures incurred by maintaining assets in proper wor#ing order e.g., repairs to plant and machinery, building furniture and fittings etc. $. Expenditures incurred for meeting day to day expenses of carrying on a business e.g., salaries, rent, rates, taxes, stationery, postage etc. All revenue expenditures ha e to be deducted from the income earned by the firm. !hat is to say, all re enue items will be ta#en to the profit and loss account.

List of Revenue Expenditures - (Examples of Revenue Expenditures):


!he following is a list of the usual items of re enue expenditures: Expenses incurred for the ordinary administration and carrying on the business. Expenses for repairs, renewals and replacement of permanent assets. &ost of goods for resale. &ost of raw materials and stores acquired for consumption in course of manufacturing. (ages paid for manufacture of products for sales. Expenses for the manufacture and distribution of the finished goods. )oss from wear and tear and obsolescence of assets. Depreciation of lease.

*nterest on loans borrowed for business. )oss from sale of fixed assets. Fees for renewal of patent rights, etc. +p,#eep and maintenance of motor car and an. -aintenance of fan and lights. .oo# alue of assets discarded or totally damaged or destroyed by fire or other reasons.

Difference Between Capital and Revenue Expenditures:


Learning Objectives: 1. (hat is the difference between capital and re enue expenditures. Following is the difference between capital and revenue expenditures . Capital Expenditures 1 *ts effect is long term i.e., it is not exhausted within the current account year. *ts benefit is en/oyed in future year or years also. *n a word, its effect is reduces gradually. An asset is acquired or the alue of an asset is increased as a result result of this expenditure. *t does not occur again and again , it is non,recurring and irregular. 1enerally, it has physical existence i.e., it can be seen with eyes. !his expenditure impro es the position of the concern A portion of this expenditure is shown in the trading and profit and loss account or income and expenditure account as depreciation. 1 Revenue Expenditures *ts effect is temporary, i.e., it is exhausted within the current accounting year.

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0either an asset is acquired nor the alue of an asset is increased. *t occurs repeatedly , *t is recurring and regular. *t has no physical existence, i.e., it cannot be seen with eyes. !his expenditure helps to maintain the concern !he whole amount of this expenditure is shown in trading and profit and loss account or income and expense account. .ut deferred re enue expenditures and prepaid expenses are not shown. *t does not appear in balance sheet. Deferred re enue expenditure, outstanding expenditure, outstanding expenses and prepaid expenses, howe er, temporarily shown in the balance sheet. *t reduces re enue. 6ayment of

$ % 2 3

$ % 2 3

*t appears in balance sheet until its benefit is fully exhausted.

*t does not reduce the re enue of the

concern. 6urchase of fixed assets does not effect re enue.

salaries to employees decreases re enue.

7ome 8 &apital and 9e enue 8 &apital and 9e enue receipts, 6ayments, 6rofits, and )osses

Capital and Revenue Receipts, Pa ments, Profits and Losses:


Learning Objectives: 1. Define and explain and gi e examples of capital and re enue receipts and payments: ". Define and explain and gi e examples of capital and re enue profits and losses: Contents: 1. &apitali;ed and 9e enue 9eceipts ". &apital and 9e enue 6ayments $. &apital and 9e enue 6rofits %. &apital and 9e enue )osses

Capitali!ed and Revenue Receipts:


9eceipts refer to the actual amounts of cash recei ed. !hey can be either of capital nature or re enue nature. Capital receipts include the following: 1. &apital brought in by the proprietor at the commencement and any additions made subsequently. ". -oney borrowed from partners, ban#ers, pri ate indi iduals etc. $. -oney recei ed by the sale of fixed assets. %. -oney recei ed on account of capital profit. Revenue receipts include the following: 1. -oney recei ed by the sale of floating assets , by sale of goods.

". -oney recei ed on account of some re enue profit.

Capital and Revenue Pa ments:


Definition and Explanation:
Capital payment is an amount paid on account of some capital expenditure and arevenue payment is an amount actually paid on account of some re enue expenditure. Expenditure is the full amount incurred whether paid or not, whilst payments refer to the amount actually paid.

Example:
*f a building is purchased for <"=,=== from > and <1=,=== is paid in cash and the remaining sum to be paid after six months? <"=,=== is capital expenditure, but <1=,=== is only capital payment. 'imilarly if goods are purchased from > for $=,=== and <12,=== is paid in cash? <$=,=== is re enue expenditure but only <12,=== is re enue payment.

Capital and Revenue Profits:


Definition and Explanation:
Capital profit means a profit made on the sale of a fixed asset or profit earned on raising monies for the business. For example a building purchased for <"=,=== is sold for <"2,=== the profit <2,=== thus made is a capital profit. Revenue profit on the other hand is a profit made by the business e.g., profit on the sale of goods, income from in estments, commission earned etc. (hene er, capital profit is made it should either be transferred to the capital account of the proprietor or credited to capital reser e account which would appear as a liability on the balance sheet. .ut capital profits should in no case be transferred to profit and loss account because it is non,trading profit. 9e enue profits on the other hand should be transferred to profit and loss account because they arise out of regular trading operation.

Capital and Revenue Losses:


Definition and Explanation:
Capital loss means a loss made on the sale of a fixed asset or a loss incurred in connection with the raising of money for business. &apital loss may be shown as an asset in the balance sheet. .ut as this asset is a fictitious nature, it would would ad isable to write off it. Revenue loss, on the other hand, is the loss incurred in trading operations such as loss on the sale of goods. 9e enue losses are charged to profit and loss account of the year in which they occur.

"ore #$out Capital and Revenue Expenditures:


Capitali!ed or Deferred Revenue Expenditures:
(here a certain re enue expenditure incurred is of such a nature that its benefit is li#ely to be spread o er a certain number of years, or where it is of non,recurring and special nature and large in amount, in such circumstances, instead of debiting the entire amount to the profit and loss account of the year in which it has been incurred, it may be spread o er a number of years, a proportionate amount being charged to each year@s profit and loss account. !he remaining portion of the expenditure is carried forward and is #nown as capital expenditure or or deferred re enue expenditure and is shown as an asset in the balance sheet. *tem such as preliminary expenses, cost of issue of debentures are examples that may be classified under this head.

Exceptions to %eneral rules:


!here are certain expenses which are usually of a re enue in nature but under certain circumstances they become capital expenditures. !he following are the examples of expenses which are usually re enue but under certain circumstances become capital.

Le&al C'ar&es:
!hese are, as a rule, re enue charges, but legal charges incurred in connection with the purchase of a fixed asset are capital expenditures as they form an additional cost of the asset acquired.

(a&es:
(ages are ordinary a re enue expenditure. .ut in a manufacturing business where the firm@s own men are employed in ma#ing of fixed asset, the wages paid for such purpose would be capitali;ed. For example if the firm@s own men are employed in ma#ing extension to the factory building or in erection of plant or manufacturing tools for own requirements. the wages and salaries paid to the persons are not re enue but capital expenditures.

Bro)era&e and *tamp Dut :


0ormally these are re enue expenditures, but bro#erage paid on acquisition of a property and stamp duty in ol ed thereon can be capitali;ed.

+rei&'t and Carria&e:


!his is re enue charge, but freight and carriage paid on newly acquired plant or fixed assets are capital expenditures.

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Ardinarily amount expended on ad ertising is re enue charge but the cost of special ad ertising underta#en for the purpose of introducing a new line of goods may be capitali;ed.

Development Expense:
*n concern li#e collieries, mines, tea, rubber etc., all expenses incurred during the period of de elopment are treated as capital.

Preliminar Expenses:
!hese are the expenses incurred in connection with the formation of a public company. !hese expenses although are re enue in nature but are allowed to be capitali;ed and can be shown as an asset in the balance sheet.