Capital and revenue expenditure

Expenses are the use or consumption of goods and services in the process of obtaining revenues.
Expenditure is usually of two types:

(1) Capital Expenditure

Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but
spread over several accounting periods.

It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business. These
are not meant for sale.

Expenditure incurred for improving assets and extending an existing asset is also capital expenditure.
The sum of invoice price, freight and insurance charges, installation and custom duty etc. will be capitalized, i.e, they
appear on the assets side of Balance Sheet.

Examples:
(a) Expenditure in connection with or incidental to the purchase or installation of an asset.
(b) Acquisition of new assets.
(c) Expenditure incurred for putting the asset purchased, into working condition.
(d) Additions and extensions to existing assets.
(e) Betterment of fixed assets or improvement of an asset to produce more, to improve its earning capacity or to
reduce its operating expenses or to increase the life of asset.

(2) Revenue Expenditure

Revenue expenditure consists of expenditure incurred in one accounting period, the full benefit of which is enjoyed
in that period only.

This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning
capacity of the business.

It includes all expenses which arise in normal course of business. The benefit of such expenditure is for a short period,
say, one year only and it is not to be carried forward to the next year.

The expenditure is of a recurring nature i.e. incurred every year or month. Examples:
(a) Purchase of raw materials for conversion into finished goods.
(b) Selling and distribution expenses e.g. sales office expenses, delivery expenses, advertisement charges, etc
(c) Establishment expenses like salaries, wages, rent, rates, taxes, insurance.
(d) Depreciation of plant, machinery and equipment.
(e) Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such' as repairs
to building, repairs to plant.

All these items appear in the Income Statement as expenses.

 Basis of Difference Capital Expenditure Revenue Expenditure
Purpose Incurred for purchase of non- Incurred for maintenance of non-
current assets current assets

Earning capacity Increases earning capacity Does not increase earning capacity

Period of benefit Benefits spread over a number of Benefits only for one accounting
years year

Financial Statements Appear as assets in Statement of Appear as expenses in Income

Financial Position Statement

Occurrence Of a non-recurring nature Of a recurring nature

Question 1: State which of the following is capital or revenue expenditure.

1. Bought a motor vehicle for use in the business

2. Paid legal fees in connection with the purchase of a property
3. Paid legal fees in connection with the collection of outstanding debts
4. Painted the company building for the first time
5. Repainted the company building after 5 years
6. Installation of air conditioners in all office premises.
7. Petrol expenses for the running of the company’s vehicles
8. Painted the company’s logo on all delivery vans
9. Redecoration of office premises for New Year
10. Paid for wages of workmen working on the extension of office premises
11. Installed air filters in all machines so as to improve their operating capacity
12. Paid for the monthly heating and lighting bill
13. Paid for repairs to the company’s existing motor vehicles
14. Paid for transportation costs for bringing a new machine to the office premises
15. Bought new tyres for the company’s existing vehicles.