Fixed Assets ( Capital Expenses or CAPEX ) And Revenue Expenses ( Day today

expenses )

As we have discussed in the last class that Capital expenditure ( assets ) will not
appear in Profit & Loss account and will be presented directly under Balance sheet
where as all day today expenses which are called Revenue Expenses goes in Profit
& Loss Account.

When the benefit from the expenses is for more than one year, it is treated as asset
whereas when benefit is for less than one year i.e only for the year in which they
are incurred it is called Revenue expenses. For example when a machine of
Rs.1,00,000 is purchased for the business and where the life of the machine is 10
years it means business is going to receive the benefit from the machine ( by using
it for manufacture ) for next 10 years and not only for the year in which it is
purchased. Any expenditure incurred on fixed asset to increase the productivity or
earning capacity is treated as capital expenditure.

Following expenses are treated as capital expenses ( assets )

1. Any asset purchased ( machinery, furniture, building etc )

2. Expenditure on a foreign tour to purchase machinery
3. Insurance and freight on machinery purchased
4. Custom duty paid on machinery purchased
5. Wages for erection of a machinery
6. Installation charges of machine purchased
7. Expenses incurred on trial run of the asset
8. Cost of a second hand machine purchased
9. Repair of second hand machinery before put to use
10.Interest on term loan for the purchase of machinery before commercial
production starts
11.Money spent to reduce working expenses
12.Amount spend on to replace petrol driven engine by CNG kit
13.Cost of rings and pistons of an engine changed to get fuel efficiency
14.Overhauling expenses of a engine of a motor car to get more fuel efficiency
15.Legal expenses to acquire a building
16.Amount spend on repairing an old building for the first time on purchase
17.Expenses to obtaining license for a factory
18.Amount spend on construction of temporary huts for storing building
material while constructing building
 19.Deposit for installing telephone
20.Amount spent on demolishing a building to construction new building on the
same sight
21.Cost of improvement in electric wiring system
22.Purchase of a patent right
23.Purchase of a goodwill
24.Purchase of technical know how
25.Purchase of a live stock by a farmer
26.Amount spent on neon sign board at Airport

Revenue Expenditure ( Expenses of the business )

Expenses also covers operational expenses and other expenses. Expenses relating
to main activity of the business are coming under operational expenses for example
for Tata Motors- raw material, power, repairs to machinery, repairs to building,
repainting of a building, maintenance expenses, depreciation , office expenses,
legal expenses selling expenses, yearly insurance, expenses for removal of stock to
other site, fines imposed, compensation to workers under VRS, import duty on
purchase of material etc. We observe here that we have put revenue
receipts/incomes ( income from business) on one hand and all expenses on the
other hand so as to calculate profit or loss. Another important point is expenses
what we have recorded all are recurring in nature. These are the expenses where no
any asset is created. In fact benefit from this expenses is already received by the
business i.e. different parties involved have already provided the services to the
business against which business has to pay such as material is received from
supplier, workers have worked or the business, space is occupied by the business
so rent is paid Electricity and telephone services are received by the business etc.
These expenses are called Revenue Expenses. These expenses are routine expenses
and will be repeated again and again during the year.

Following are some revenue expenses for a hotel business

1. Food and beverages 2.salary to staff 3. licensing and fees 4. Electricity and
water 5. Fuel, coal and gas 6.Washing and cleaning 7. Linen and uniform
expenses 8.Painting and Decoration 9. Repairs and maintenance 10. Laundry
expenses 11. Various taxes 12. Crockery expenses 13. Advertisement 14. Audit
fees 15. Computer maintenance 16.Books and newspaper etc. So depending upon
the business and product, revenue expenses will be different .

Example

Mr.Anand after completing his MBA, started his own furniture business along with
his father, under the name Anand Ply woods Private Limited. They depositing
Rs.10,00,000 each in company’s bank account towards Equity Capital.( 2,00,000
Equity Shares of the face value of Rs.10 each ). Company purchased a plot of
Rs.750,000 and constructed a shed by spending Rs.250,000. During the year
company approached a bank and has taken a loan of Rs.500,000 @ 10% interest.
Sale for the year were made for Rs.25,00,000 and during the year, following
expenses were incurred and paid

Purchase of furniture stock Rs. 15,00,000, Wages & Salaries Rs.200,000,

Electricity expenses – Rs.25000, Advertisement Rs.150,000 and delivery expenses
Rs.45000, Interest paid on Bank Loan Rs.50,000.

Corporate Tax paid at 30%.

1. Explain the capital expenditure and revenue expenditure involved in the first
year of business

2. Prepare Profit & Loss Account and Balance sheet of the Company.