Capital And Revenue Expenditure

Expenditure can be classified into the Capital and Revenue Expenditure:

Capital Expenditure: Capital Expenditure is that expenditure which results in acquisition of an asset and can later be sold and converted into cash or which results in an increasing in the earning capacity of a business.  Another test of a capital expenditure is that the benefit of such expenditure lasts for a long period of time.

Following are some of the examples of capital expenditure:

Money paid for purchase of fixed assets e.g. land, buildings, machinery, furniture, patents, etc.,

• All sums spent upto the point an asset is ready for use should also be treated as capital expenditure e.g. fees paid to lawyer for drawing a purchase deed of land, overhauling expenses of second hand machinery, cartage paid for bringing machinery to the factory from supplier’s premises and money spent to install a machinery even interest on loans taken to acquire fixed assets but only for the period before the asset becomes operational
• Expenditure incurred for the improvement and expansion of fixed assets which increases the useful life or capacity or efficiency of a fixed asset.
• Expenditure incurred for substitution of a new asset for an existing asset.
• Expenditure incurred for acquiring the right of carrying on a business e.g. purchase of patent rights, copyright, goodwill, etc.

Revenue Expenditure: An expenditure that arises out of and in the course of regular business transactions of a concern is termed as revenue expenditure. These expenses are recurring in nature.  Following are few examples of revenue expenditure: 

• Expenses incurred in the normal course of running the business e.g. rent, salary, wages, advertisement, legal expenses, local taxes, interest, etc.
•  Cost of goods sold
• Expenditure incurred to maintain the fixed assets e.g. repairs, etc.
• Depreciation on fixed assets.
• Expenditure incurred to defend assets ownership.

Thus, revenue expenditure is that expenditure the benefit of which does not extend beyond the current period.