CAPITAL

AND
REVENUE EXPENDITURE
 Capital Expenditure
• Capital expenditure generally involved
purchasing or improving an asset that is
used in the business. Examples of capital
expenditure would include the acquisition of
a property, improvements to that property,
such as an extending or renovating the
property or the purchase of assets such as
plant and machinery (for example, office
equipment or vehicles used in the property
letting business)
 Capital Expenditure Intangible
Assets
• Certain expenses are recognized as being of a
capital nature, although no tangible property
may have been acquired as a result.
Examples are research and
development expenditure, pre-incorporation and
preliminary expenses, interest on borrowings for
building, legal expenses to acquire property,
additional renovations to properties and others
 Revenue Expenditure
• The Expenditure made on the upkeep
of capital assets to maintain their
earning capacity is called Revenue
Expenditure. Day to day expenses for
running of business are Revenue
Expenditure.
 Capital & Revenue Expenditure--
Difference
• A capital expenditure is an amount spent to acquire or improve a
long-term asset such as equipment or buildings. Usually the cost is
recorded in an account classified as Property, Plant and Equipment.
The cost (except for the cost of land) will then be charged to
depreciation expense over the useful life of the asset.

• A revenue expenditure is an amount that is expensed immediately

—thereby being matched with revenues of the current accounting
period. Routine repairs are revenue expenditures because they are
charged directly to an account such as Repairs and Maintenance
Expense. Even significant repairs that do not extend the life of the
asset or do not improve the asset (the repairs merely return the
asset back to its previous condition) are revenue expenditures.
 Capital & Revenue Expenditure–
Difference Conti..
• when the purpose of expenditure is to
Maintain the business it is revenue and if it
is to Improve the business it is capital.
However, at times in a company, Â
classification of pure capital or revenue
expenditure in a company is not so
straightforward especially when there is a
mixture of both capital and revenue
expenditure in nature.
 1. Nature of Assets purchased

• Capital Expenditure • Revenue Expenditure

• Any expenditure • Any expenditure

incurred to acquire a incurred as price of
fixed asset or in goods purchased for
connection with resale along with other
installation (expenses necessary expenses
for installation) of fixed incurred in connection
asset is capital with such purchase are
expenditure. revenue expenses
 2. Discharging Liability

• Capital Expenditure • Revenue Expenditure

• A payment made by a • An expenditure incurred

person to discharge a to discharge a revenue
capital liability is a liability is revenue
capital expenditure expenditure
 3. Based on Transactions

• Capital Expenditure • Revenue Expenditure

• If expenditure is • An expenditure
incurred to acquire a incurred to earn an
source of income, it is income is revenue
capital expenditure e.g., expenditure E.g. salary,
purchase of patents to advertisement etc.
produce picture tubes
of TV set.
 4. Purpose of Transactions

• Capital Expenditure • Revenue

Expenditure
• If the amount is spent
on increasing the • Any expenditure
earning capacity of an incurred on keeping
asset it is capital an asset in running
expenditure condition is revenue
expenditure
 5. Nature of Payments in the
hands of payer
• Capital Expenditure • Revenue Expenditure

• If the expenses is incurred • If the nature of payment in

for acquiring capital asset the hands of payer is of
from revenue receipts is revenue nature, it will be
also treated as capital revenue expenditure
expenditure
 CAPITAL EXPENDITURE

1. Cost of reconstructing, refurnishing, etc. of a business

building.
2. Payment made with a view to keeping his competitor out of his
field of business
3. Expenditure incurred in converting business premises when
switching over from manufacture of one product to another.
4. Expenditure on litigation in connection with acquiring or
curing defective assets of the business.
5. Compensation paid for cancellation of contract for the
purchase of machinery.
6. Price paid for the purchase of partner’s share in the firm.
7. Expenditure incurred on the maintenance of business
reputation
 REVENUE EXPENDITURE

1. Payment made for use of quota rights, or for use of patents

and trade marks.
2. Payment made for technical assistance.
3. Expenditure incurred to send employees abroad for practical
training
4. Repairs and maintenance incurred for machinery
5. Discharging compensation package to the employees
6. Expenditure incurred in raising loans, e.g., stamp duty,
registration and legal fees, brokerage etc.
7. Any such expenditure incurred wholly, totally, necessarily for
the business.
 Capital receipts & Revenue
receipts
Receipts refer to the actual amounts of cash received. They can
be either of capital nature or revenue nature.

• Capital receipts include the following:

1. Capital brought in by the proprietor at the commencement and any
additions made subsequently.
2. Money borrowed from partners, bankers, private individuals etc.
3. Money received by the sale of fixed assets.
4. Money received on account of capital profit.

• Revenue receipts include the following:

1. Money received by the sale of floating assets - by sale of goods.
2. Money received on account of some revenue profit.
 Capital and Revenue Payments:

• Definition and Explanation:

• Capital payment is an amount paid on account of some capital
expenditure and a revenue payment is an amount actually paid on
account of some revenue expenditure. Expenditure is the full
amount incurred whether paid or not, whilst payments refer to the
amount actually paid.
• Example:
• If a building is purchased for Rs.20,000 from X and Rs. 10,000 is
paid in cash and the remaining sum to be paid after six months;
Rs.20,000 is capital expenditure, but Rs. 10,000 is only capital
payment. Similarly if goods are purchased from X for Rs. 30,000
and Rs. 15,000 is paid in cash; Rs.30,000 is revenue expenditure
but only Rs. 15,000 is revenue 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 Rs. 20,000 is sold for Rs. 25,000 the profit
Rs. 5,000 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 investments,
commission earned etc.
• Whenever, capital profit is made it should either be transferred to
the capital account of the proprietor or credited to capital reserve
account which would appear as a liability on the balance sheet. But
capital profits should in no case be transferred to profit and loss
account because it is non-trading profit. Revenue 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. Capital
loss may be shown as an asset in the balance
sheet. But as this asset is a fictitious nature, it
would advisable 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. Revenue losses are charged
to profit and loss account of the year in which
they occur.
 Practical Exercises
• Q. Whether following are capital or are revenue Expenditure:
1. Legal charges paid for registration of land.
2. Depreciation of plant.
3. Staff Car maintenance expenses.
4. Cleanliness expenses of office building.
5. Rent paid for officers flats
6. Travelling allowance paid to Inspection officer before
purchase of Machinery.
7. Transportation charges of Machine before commissioning.
8. Interest payment on borrowed money before commissioning
of workshop.
9. Sale of output during test run of plant.
10. Repair & Maintenance Expenses of Building before
commissioning of Plant.
 Practical Exercise-II
Q.A company charged to P&L A/c Rs.101000 as depreciation @ 10%
on Heat Exchanger on SLM basis for complete year 2009-10 while
the same was put to use for commercial purpose in July
2009.However the Exchanger was purchased in April 2009.The cost
of purchase was Rs.10,00000 (which included Mandatory Spares of
Rs.200000) and its installation expenses worked out to Rs.10000.
• Whether depreciation charged is correct?
• Whether depreciation was rightly charged to Revenue / P&L A/c?
• What shall be the treatment of Mandatory spares?
• whether Installation charges are of Revenue or Capital Nature?
 Practical Exercise-III
• Whether following are Capital or Revenue
Receipts:
1. Partners share in Partnership Firm
2. Borrowings from Bank
3. Money received from sale of assets
4. Consultancy charges paid by a client
5. Grants received from Govt. for Office Expenses.