capital , revenue expenditure and income

7/29/2019 Capital , Revenue Expenditure and Income

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Capital, Revenue Expenditure and Income

Naveen.Rohatgi

CA.CS.ICWA.MBA


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Capital Expenditure

According to KohIer definition of capital expenditure is asfollows

Capital Expenditure is an expenditure intended to benefitfuture goods, in contrast to a revenue expenditure whichbenefits a current period; and addition to a capital asset.The term is generally restricted to expenditures that addfixed asset units or that have the effect of increasing thecapacity, efficiency, life span or economy of operation of anexisting fixed asset. It results in:

acquisition of a tangible asset or a right in asset, benefit for a long period.


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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.


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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 consumptionis 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 earningcapacity.

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.


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Expenditure incurred in raising capital required for earning

profits.

Expenditure incurred for acquiring the right to carry

business.


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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 arecapital 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 thedate of installation.

Administration overheads relating to acquisition of fixedasset.


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2.Expenditure incurred during construction period or capitalwork in progress is considered as a capital expenditure. Itincludes the following:

Preparation of project report, cost of conductingfeasibility study, market survey, negotiations forcollaboration.

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 underconstruction.

Cost of temporary houses provided to workers duringconstruction period.

Cost of temporary water and power connection.


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Expenses relating to acquisition of land viz. Cost ofpurchase, legal charges, stamp duties, registrationcharges, survey and leveling etc.

Cost of building purchased along with land butdemolished later on.

Expenses on commissioning of the project.


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3.Expenditure that improves the standard of performanceof 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.

4.Cost of an addition or extension to an existing asset.

Investment in shares, debentures, immovable properties etc.


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5.Investment in shares, debentures, immovable properties etc.

6.Cost of acquiring intangible assets viz, goodwill, patents,copyrights, sole selling rights, licence, trade mark, know-how

etc.7.Cost of acquisition and development of wasting asset likemines, oil- well, tea estate etc.


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Revenue Expenditure

Kohler define Revenue Expenditure as follows:

It is an expenditure charged against operation : a term used to

contrast with Capital Expenditure.Any expenditure which is not a capital expenditure and whichis incurred for carrying the day to day business activities iscalled revenue expenditure. Such expenditure may be incurred

for maintaining the fixed assets in the state of workingefficiency. The benefit of such expenditure is for a short period,in any case not more than a year. It is not spread over the yearsto come. The value of the expenditure is comparatively small. It

includes such items as, replacements, repairs, renewals,depreciation of fixed assets, discounts, raw materials, wages,salaries, power etc. These are charged to Profit & Loss Accountto ascertain the profit or loss from business.


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Tests of Revenue Expenditure:

the amount spent is relatively small, but not always,

the purpose is to maintain the business, or asset in usable

working condition,

the benefit of such an expenditure is exhausted in a short

period, in any case not more than one year,

the expenditure is of a recurring nature i.e. arises againand again,

it is shown in Profit & Loss Account.


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RECEIPTS

Capital Receipts

Capital receipts are those receipts, which do not recur. They are

of an unusual nature not arising through normal activities ofthe business. For example, amount received on account of issueof fresh share capital, Debentures, amount of loans raised,proceeds on sale of fixed assets. Deposits, Premium on shares

and debentures etc.Revenue Receipts

Revenue receipts are those items of income, which arereceived or accrued, in the ordinary course of business. For

example, cash received on account of sales, discount received,commission received, interest and dividend on investments,transfer fees etc. Revenue receipts are credited to Profit & LossAccount whereas the capital receipts will affect the Balance

Sheet.

capital , revenue expenditure and income

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