Capital, Revenue Expenditure and Income

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.

4.Cost of an addition or extension to an existing asset. Investment in shares, debentures, immovable properties etc.

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 like mines, oil- well, tea estate etc.

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 which is incurred for carrying the day to day business activities is called revenue expenditure. Such expenditure may be incurred for maintaining the fixed assets in the state of working efficiency. The benefit of such expenditure is for a short period, in any case not more than a year. It is not spread over the years to 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 Account to ascertain the profit or loss from business.

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 again and again, it is shown in Profit & Loss Account.

RECEIPTS Capital Receipts Capital receipts are those receipts, which do not recur. They are of an unusual nature not arising through normal activities of the business. For example, amount received on account of issue of 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 are received 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 & Loss Account whereas the capital receipts will affect the Balance Sheet.