CAPITAL EXPENDITURE v/s REVENUE EXPENDITURE

V.SRIHARSHA(11MBMA57) SUMERA NAAZ(11MBMA13) RITESH JOSHI(11MBMA16) M.NARESH(11MBMA28) SANTOSH MOULI(11MBMA41)

Expenditure
Expenses are the using or consuming of goods and services in the process of obtaining revenues. Expense is the expired cost, directly or indirectly related to given fiscal period, of the flow of goods or services into the market and of related operations.

Types of Expenditure
Expenditure is usually of two types a) Capital expenditure; and b) Revenue expenditure.

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 or effecting economy in the operation of an asset. These are not meant for sale. Expenditure incurred for improving assets and extending an existing asset is also capital expenditure.

Capital Expenditure
The sum of invoice price, freight and insurance charges , installation and erection cost and custom duty etc. will be capitalized in the books of a firm. These capital items appear on the assets side of Balance Sheet.

Capital Expenditure Examples

Interest on capital paid during the period of construction of Company Expenditure in connection with or incidental to the purchase or installation of an asset. Acquisition of new assets. Expenditure incurred for putting the old asset purchased, into working condition. Additions and extensions to existing assets. Interest and financing charges paid, brokerage and commission paid. 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.

Capital gain
A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. Capital gains may refer to "investment income" that arises in relation to real assets, such as property; financial assets, such as shares/stocks or bonds; and intangible assets such as goodwill.

Capital Loss
The loss incurred when a capital asset (investment or real estate) decreases in value. This loss is not realized until the asset is sold for a price that is lower than the original purchase price. For example, if an investor bought a house for $250,000 and sold the house five years later for $200,000, the investor would realize a capital loss of $50,000.

Revenue Expenditure
Revenue expenditure consists of expenditure incurred in one period of the accounting, 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.

Revenue Expenditure Examples

Purchase of raw materials for conversion into finished goods. Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, etc. Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment. Depreciation of plant, machinery and equipment. Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such' as repairs to building, repairs to plant, white-washing and painting of building.

Deferred Revenue Expenditure

Deferred Revenue Expenditure is a revenue expenditure which has been incurred during one accounting year which is applicable either wholly or in part to further accounting years. According to Prof. A.W. Johnson, "Deferred Revenue Expenditure includes those nonrecurring expenses, which are expected to be of financial nature, distributed to several accounting periods of indeterminate total length. These are of revenue nature but are deferred or postponed. It is of quasi- capital nature."

Deferred Revenue Expenditure

Deferred Revenue Expenses are those expenses, the benefit of which may be extended to a number of years, say, 3 to 5 years. These are to be charged to profit and loss account, over a period of 3 to 5 years depending upon the benefit accrued.

Deferred Revenue Expenditure

Sometimes losses may be suffered of an exceptional nature e.g. loss of an asset (uninsured) due to accident or fire; confiscation of property in a foreign country etc. the amount which has not been debited to the profit and loss account of the current year is shown in the balance sheet on the assets side and it is known as fictitious asset.

Purpose of Distinction
Profit and Loss Account is debited with revenue expenditure and credited with revenue income (i.e. sales income and from other sources). If the revenue income is higher than revenue expenditure, it will be a profit and if it is less than revenue expenditure, it will be a loss. Capital expenditure is shown on the assets side of Balance Sheet. Capital and liabilities are shown on the liabilities side of Balance Sheet.

Revenue v/s Capital expenditure

Revenue Expenditure
Its effect is temporary, i.e. the benefit is received within the accounting year. Neither an asset is acquired nor the value of an asset is increased. It has no physical existence because it is incurred on items which are used by the business. It is recurring and regular and it occurs repeatedly. This expenditure helps to maintain the business.

Capital Expenditure
Its effect is long-term, i.e. it is not exhausted within the current accounting year-its benefit is received for a number of years in future. An asset is acquired or the value of an existing asset is increased. Generally it has physical existence except intangible assets. It does not occur again and again. It is nonrecurring and irregular. This expenditure improves the position of the business.

Capital expenditure v/s revenue expenditure

The whole amount of this expenditure is shown in trading P & L A/c or income statement. It does not appear in the balance sheet. A portion of this expenditure (depreciation on assets) is shown in trading & P & L A/c and the balance is shown in the balance sheet on asset side. It appears in the balance sheet until its benefit is fully exhausted.