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Naveen.Rohatgi
CA.CS.ICWA.MBA
Capital Expenditure
According to KohIer definition of capital expenditure is as
follows
Capital Expenditure is an expenditure intended to benefit
future goods, in contrast to a revenue expenditure which
benefits a current period; and addition to a capital asset.
The term is generally restricted to expenditures that add
fixed asset units or that have the effect of increasing the
capacity, efficiency, life span or economy of operation of an
existing fixed asset. It results in:
acquisition of a tangible asset or a right in asset,
benefit for a long period.
Capital expenditure is that expenditure the benefit of which is
enjoyed or consumed not in one year only but over many years. It
is the expenditure incurred which results in the purchase or
acquisition of assets and properties, which may be used for many
years. The main purpose of incurring such expenditure is to earn
income over a period of years or increase the earning capacity of
the business concern with the aid of such expenditure. For
example, purchase of plant and machinery, land and buildings etc.
These assets are used over a period of years. Such capital
expenditure is shown in the balance sheet.
Capital expenditure is one, which is incurred for the following
purposes:
Purchase of assets for business for earning profits with
their use, but goods purchased for resale or consumption
is not a capital expenditure but revenue expenditure.
Expenditure incurred for the purpose of putting into
working condition an old asset bought.
Expenditure incurred for putting a new asset to use for
example installation and erection charges
Expenditure incurred on extension to or improvement of
an asset, to produce more, to improve its revenue earning
capacity.
Expenditure incurred on an asset for increasing the
revenue earning capacity of it, i.e. improving the
production of income, or increasing the life of the asset.
Expenditure incurred in raising capital required for earning
profits.
Expenditure incurred for acquiring the right to carry
business.
Examples of Capital Expenditure:
1. Purchase of a fixed asset
It is the most common type of capital expenditure. All the
expenses incurred on the assets till they yield income are
capital in nature. As per AS1O, cost of fixed asset includes
Purchase price.
Import duties .& taxes.
Initial delivery and handling cost.
Installation cost.
Professional fees for the architects.
Interest on loan taken for purchase of machinery till the
date of installation.
Administration overheads relating to acquisition of fixed
asset.
2.Expenditure incurred during construction period or capital
work in progress is considered as a capital expenditure. It
includes the following:
Preparation of project report, cost of conducting
feasibility study, market survey, negotiations for
collaboration.
Interest charges.
Cost of employees connected with the project work.
Consultation fees about the project.
Office expenses about the project work.
Insurance premium to insure the asset under
construction.
Cost of temporary houses provided to workers during
construction period.
Cost of temporary water and power connection.
Expenses relating to acquisition of land viz. Cost of
purchase, legal charges, stamp duties, registration
charges, survey and leveling etc.
Cost of building purchased along with land but
demolished later on.
Expenses on commissioning of the project.
3.Expenditure that improves the standard of performance
of an existing asset.
Such expenditure is capitalised. It is added to the cost of fixed
asset. It includes
Expenditure which extends the useful life of the asset.
Expenditure which expands the capacity of the asset.
Expenditure which improves the efficiency of the asset.
Expenditure which improves economy of operation.
Expenditure which increases productivity of the asset.