CAPITAL AND REVENUE EXPENDITURE/INCOME CLASSIFICATION OF EXPENDITURE Expenditure can be classified into three categories: (1) Capital Expenditure

(2) Revenue Expenditure (3) Deferred Revenue Expenditure (1) Capital expenditure: Capital expenditure is that expenditure which result in acquisition of an asset and can later be sold and converted into cash or which results in an increase 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: (a) Cost of fixed or permanent assets, such as lands, buildings, machinery, patent rights, vehicles, furniture, loose tools, etc., purchased for use in business are capital expenditure. (b) Cost of additions or extensions to existing fixed assets, such as costs of addition to machinery, costs of extensions to buildings, etc., are capital expenditure. (c) Any expenditure incurred in connection with the acquisition, (i.e., purchase) of fixed assets is a capital expenditure. For example, legal charges and brokerage paid for acquiring land and buildings are capital expenditure. (d) Any expenditure incurred in bringing the assets purchased to the business is a capital expenditure. For example, carriage or freight paid for bringing the machinery purchased is a capital expenditure. (e) Any expenditure incurred in installing the fixed assets is a capital expenditure. For example, charges incurred on the erection of machinery or charges incurred in the fixing of fans are capital expenditure. (f) Any expenditure incurred on the alternations and improvements of existing fixed assets so as to increase their income earning capacity is treated as a capital expenditure. For example, a large amount spent on a useless machine so as to make useful is treated as capital expenditure because it increases the revenue earning capacity of the fixed asset.

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Development expenditure (i.e., amount spent on an asset before it has started yielding) is a capital expenditure. For instance , amount spent on a tea estate or rubber estate before, it has started yielding is a capital expenditure.

REVENUE EXPENDITURE: An expenditure that arises out of and in the course of regular business transactions of a concern is termed as revenue expenditure. In other words, expenses whose benefit expires within the year of expenditure and which are incurred to maintain the earning capacity of existing assets are termed as revenue expenditure. These expenses are recurring in nature. Following are few examples of revenue expenditure: (a) Cost of goods purchased for resale is revenue expenditure. (b) Expenses, such as carriage, freight, etc., incurred in bringing the goods purchased to the place of business are revenue expenditure. (c) Cost of material consumed in the manufacture of goods for meant for resale is revenue expenditure. (d) Expenses incurred in manufacturing goods for resale are revenue expenditure, e.g., wages, power, factory rent, insurance, factory heating, etc. (e) Expenses incurred for the day-to-day management of the business are revenue expenditure, e.g., salaries, rent, law charges, bank charges, printing and stationery, postage and telegrams, etc. (f) Expenses incurred for selling the products are revenue expenditure, e.g., advertisement, commission paid, carriage outward, bad debts, etc. (g) Any expenditure which is incurred for maintaining the fixed assets in good working order or condition is revenue expenditure, i.e., repairs, replacements and renewals of fixed assets. (h) Interest on loan borrowed, interest on deposits accepted, interest on capital, discount allowed, etc., are revenue expenditure. DIFFERENCES BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

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CAPITAL EXPENDITURE Capital expenditure is incurred for acquiring fixed assets intended for use in the business, and not for resale. Capital expenditure is incurred for extending or improving the existing fixed assets. Capital expenditure adds to the revenue earning capacity of a concern.

REVENUE EXPENDITURE Revenue expenditure is incurred for acquiring or producing goods meant for sale. Revenue expenditure is incurred for maintaining the fixed assets in a good working order. Revenue expenditure does not add to the revenue earning capacity of a concern.

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The benefits of capital Revenue expenditure will expenditure extend to more than decrease the value of net assets. one year. The benefit of revenue Capital expenditure will expenditure is confined to only increase the value of net assets. one year. Revenue expenditure is Capital expenditure is nonrecurring. recurring. Revenue expenditure will go to Capital expenditure will go to the Trading Account or Profit the Balance sheet. and Account.

WHEN REVENUE EXPENDITURE BECOMING CAPITAL EXPENDITURE Following are some of the circumstances under which an expenditure which is usually of revenue nature may be taken as an expenditure of a capital nature: (1) WAGES AND SALARIES: The amount spent as wages and salaries generally taken as a revenue expenses. However, amount of wages and salaries paid for the erection of a new plant or machinery or wages paid to workman engaged in

construction of fixed assets are taken as expenditure of a capital nature. (2) CARRIGE IN: Carriage charges are usually of a revenue nature but carriage charges incurred for a new plant and machinery are taken as expenditure of a capital nature and are added to the cost of asset. (3) REPAIRS: The amount spent on repairs of plant, furniture, building, etc. is taken as revenue expenditure. However, when some second hand plant, motor-car etc. is purchased, the expenditure incurred for immediate repairs of such plant, motorcar etc. to make it fit for use will be taken as a capital expenditure. (4) LEGAL EXPENSES: Legal expenses are usually taken as expenditure of a revenue nature but legal expenses incurred in connection with purchase of fixed assets should be taken as a part of the cost of fixed assets. (5) RAW MATERIALS AND STORES: They are usually taken as of a revenue nature, but raw materials and stores consumed in construction is the fixed assets should be treated as capital expenditure and be taken as a part of the cost of such fixed assets. (6) DEVELOPMENT EXPENDITURE: In case of some business such as tea, rubber, mines, plantations, horticulture etc. a long period is required for development. They start earning only after expiry of a long period which can be termed as development period. The expenditure incurred during such periods is termed as development expenditure and may be treated as a capital expenditure. However, once they begin to earn, the expenditure incurred to maintain them will be revenue expenditure. CLASSIFICATION OF INCOME OR PROFIT Income can be classified into two categories viz: (1) Capital income or Profit (2) Revenue income or Profit (1) Capital income: The term capital income means an income which does not a pertain to the running of the business proper. For example, if a building costing Rs. 10,000 purchased by a business for its use is

sold for Rs. 15,000, RS. 5,000 WILL BE TAKEN AS CAPITAL INCOME OR PROFIT. (2) Revenue income: Revenue income means an income which arises out of and in the course of the regular business transactions of a business. For example, in the course of running the business, the profit is made of sale of goods; income is received from letting on the business property etc. All such incomes are revenue incomes or profit. CLASSIFICATION OF RECEIPTS Receipts can be classified into two categories viz: (1) Capital Receipts (2) Revenue Receipts (1) Capital receipts: Capital receipts are receipts which are of nonrecurring nature (i.e., receipts which are not regular). They include : (a) Capital received from proprietor or proprietors of the concern. (b) Amounts received by way of deposits. (c) Sale proceeds of investments. (d) Sale proceeds of fixed assets, such as lands, buildings, machinery, motor vehicles, furniture, etc. (e) Amounts received by way of loans. (f) Non-recurring receipts, such as life membership fees, legacies, etc., received by a non-trading concern. (2)Revenue receipts: Revenue receipts are receipts which are of recurring nature (i.e., receipts which are received repeatedly or regularly). They include: (a) Sale proceeds of goods. (b) Sale proceeds of old packing cases. (c) Incomes from investments, such as interest and dividends received on securities. (d) Interest received on loans granted. (e) Interest on bank deposits. (f) Commission received. (g) Rent received. (h) Sale proceeds of old newspapers.

DISTINCTION BETWEEN CAPITAL RECEIPTS AND REVENUE RECEIPTS S.NO CAPITAL RECEIPTS 1 Capital receipts represent the capital received from the proprietors, loans or deposits received, sale proceeds of investments and fixed assets and non-recurring receipts, such as legacies, life membership fees, etc. 2 REVENUE RECEIPTS Revenue receipts represent the incomes, such as sale proceeds of goods, interest received, commission received, etc.

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Revenue receipts are of recurring Capital receipts are of nonnature. In other words, they are recurring nature. In other words, received repeatedly or regularly. they are not received repeatedly (i.e., again and again). Revenue receipts are not liabilities. Some of the capital receipts, such as loans and deposits received is liabilities. As revenue receipts are not As some of the capital receipts liabilities, they need not be repaid. are liabilities, they have to be repaid. Revenue receipts are incomes to the Capital receipts are not incomes concern. to the concern. Revenue receipts will go to the profit Capital receipts will go to the & loss a/c of the concern. balance sheet of the concern.