Capital and Revenue

Expenditure
POOJA GUPTA SINGLA
 Expenditure
American Accounting Association,
Committee on concepts and standards,
defines as under:
• "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.“
• Hendriksen opines, "expenses are the
using or consuming of goods and services
in the process of obtaining revenues".
 TYPES OF EXPENDITURE
• CAPITAL EXPENDITURE
• REVENUE EXPENDITURE
Capital and Revenue Expenditure

Capital expenditure is the

expenditure where the benefits are not
fully consumed in a year but spread over
several years.

Revenue Expenditure is the

expenditure which provides benefits in
the current accounting year only. It can
not be forwarded to next year or years.
 Capital Expenditures

Expenditures made to
acquire new plant
assets are known as
capital expenditures.

A capital expenditure is an
amount spent to acquire or
improve a long-term asset such
as equipment or buildings
 FEATURES OF CAPITAL
EXPENDITURE
• ARE USUALLY LARGE(RELATIVELY)
• ARE NON-RECURRING IN NATURE
• THE BENEFITS ARE OVER LONGER
DURATION
• THE PURPOSE IS TO ENHANCE
PRODUCTIVITY OF THE ASSETS
 Examples:

• 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.
 Revenue Expenditures
Expenditures to repair or
maintain plant assets that do
not extend the life or enhance
the value are known as
revenue expenditures.
A revenue expenditure is an
amount that is expensed
immediately—thereby being
matched with revenues of the
current accounting period
 FEATURES OF REVENUE
EXPENDITURE
• ARE SMALLER IN SIZE(RELATIVELY)
• ARE RECURRING IN NATURE
• THE BENEFITS ARE OVER A SHORTER
PERIOD (1 YEAR)
• THE PURPOSE IS TO RUN THE
BUSINESS ON A DAY TO DAY BASIS
• MAINTAIN ASSETS IN WORKING
CONDITION
 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
Basis of difference Capital Expenditure
Purpose of Such expenses are incurred for the
Expenses Acquisition or erection of a
permanent Asset
Increase in Earning such expenses increase the
Capacity earning capacity of the business.
Recurring or Non- these expenses are of non
Recurring recurring nature i.e,they are
incurred whenever
Period Such expenditure yields benefit
normally Over a long period.
Effect on final Such expenditure is shown in the
accounts Balance sheet.
Increase in the Such expenses result in the
value of assets Increase in the value of assets.
Revenue Expenditure
such expenses are incurred on purchase
of goods (meant for sales)and expenses
incurred for the day to day running of
business
such expenditure don’t increase the
earning capacity. These are incurred to
maintain the existing earning capacity
These are of recurring nature because
they are incurred for the conduct of
business need for incurring them is felt.
Such expenditure yields benefit for a
maximum period of one year.
Such expenditure is shown in the trading
and Profit & Loss A/C.
Such expenses are incurred to keep the
assets in good working condition.
 Capital Receipts and Revenue Receipt
It is also necessary to make a proper distinction between capital receipts
and revenue receipts because the revenue receipts are shown on the
credit side of Trading and Profit & Loss Account where as the capital
receipts are shown in the Balance Sheet either as increase in
liabilities or as reduction in the value of asset.
Capital Receipts:
Example of capital receipts are:
1. Amount received from the sale of fixed asset or investment.
2. Capital contributed by proprietors, partners or money obtained from
issue of shares and debentures in case of company.
3. Amount received by way of loan
Revenue Receipts:
1. Money obtained from sales of goods.
2. Commission and fees received from services rendered.
3. Interest and dividend received on investment.
 Capital loss and Revenue loss
Capital losses: The losses which are not related with the normal course
of business are capital losses. Examples of such losses are:
1)Loss of fixed assets like building ,plant etc, by fire or accident.
2) Loss on sale of a fixed asset.
3)Theft committed by an employee or by the outsiders by the outsiders
after business hours.
4) loss of issue of shares and debentures.
Revenue losses: The loss which are incurred in the normal course of
business are revenue losses. Examples of such losses are:
1) Loss of stock by fire or theft.
2) Misappropriation or embezzlement of cash by employees during
usual business hours.
3) Bad-debts.
 Capital profit and Revenue profit

• Capital Profit: Profit earned on sales of fixed assets or in

connection with share capital are known as capital profits.
For eg.if a machinery purchased for 30000 is sold for
40000 is capital receipt and 10000 is capital profit.
Similarly, when shares are issued at premium, the amount
of premium is capital profit.
• Revenue Profit : The profit which are earned in normal
course of business are turned as revenue profits. For
example- stock costing 100000 is sold for 125000, the
amount of 125000 is revenue receipt and 25000 is
revenue profit.