FINANCIAL ACCOUNTING

Session 5
MMS – I
MEANING AND PURPOSE OF
CAPITAL EXPENDITURE
 Capital expenditure is that expenditure,
the benefit of which is enjoyed, not only
in the year in which such expenditure is
incurred but over many years. Such
expenditure usually results in purchase or
acquisition of assets and properties which
may be used for many years.
 The main purpose of such an expenditure
is to increase the earning capacity of the
business. For example Purchase of Plant
and machinery, land and building etc is a
capital expenditure. Capital expenditure is
shown in the balance sheet.
 The features of capital expenditure
are:1. The benefit of such an expenditure
is not exhausted in one year but the
benefit of such an expenditure is enjoyed
for a longer period.
 2. Such an expenditure is of a non-
recurring nature. It does not occur
regularly.
 3. The amount spent on such an
expenditure is generally large but not
always large.
 Expenditure incurred for the
following purpose is capital
expenditure:
 1. Purchases of assets such as plant and
machinery, Land and Building.
 2. Expenditure incurred on an old asset
bought to put it in a working condition.
For example repairs expenditure incurred
on an second hand machine bought.
 3. Expenditure incurred for putting a new
asset to use e.g. installation charges for
Machine.
 4. Expenditure incurred so it becomes
economical to operate a asset, thereby
reducing the cost of operation. For
example converting a petrol engine taxi in
to a diesel engine taxi.
 5. Expenditure incurred on extension or
improvement of an asset, so as improve
the earning capacity of the business. e.g.
expenditure incurred on converting a
35MM screen in to 70 MM screen.
 6. Expenditure incurred for acquiring a
benefit of a permanent nature or a
valuable right e.g. expenditure incurred
for acquiring patent rights.
 7. Expenditure incurred on improving the
existing fixed assets.

 However expenditure incurred on

maintaining fixed asset is a revenue
expenditure.
 MEANING AND PURPOSE OF
REVENUE EXPENDITURE
 Following are the features of revenue
expenditure.
 1. The benefit of such an expenditure is
exhausted in a short period which is less
than the accounting period.
 2. Such an expenditure is incurred to
carry on day to day business activities.
 3. Such an expenditure is a recurring
expenditure
 4. Such an expenditure may be incurred
to maintain the assets.
 5. The amount of such expenditure is
generally small, but not always small.
 6. Such an expenditure is shown in profit
and loss account.
 Revenue expenditure may be
incurred for the following purposes.
 1. Expenditure for purchasing the goods
for resale or using them in manufacturing.
 2. Expenditure incurred on maintaining
and operating the asset.
 3. Expenditure incurred on protection of
business.
 MEANING OF DEFERRED
REVENUE EXPENDITURE
 All expenditure incurred for carrying on
the normal business activity is known as
revenue expenditure. The benefit of such
expenditure is enjoyed in the year in
which it is incurred. However, sometime a
heavy revenue expenditure may be
incurred in one year such that its benefit
of it may arise or enjoyed not in one year
but also in the following two or more
years.
 So much of revenue expenditure which is
likely to benefit in future is called deferred
revenue expenditure. Consider
Advertisement expenditure. Normal
Advertisement expenditure incurred is a
revenue expenditure which is written off
to profit and loss account. However, heavy
expenditure incurred on advertisement for
launching a new product may benefit for
two or more years.
 In such a case, so much of the
expenditure which benefits the current
year can be treated as revenue
expenditure, and debited to profit and loss
account and the balance may be carried
forward as Deferred revenue expenditure,
i.e., the revenue expenditure which is
postponed.
 Capital Receipts
 Capital Receipts are those receipts which
are non-recurring in Nature.
 Such receipts usually result on account of
Sale of Asset or Increase in Liability.
Examples of Such Receipts are Amount of
Loan raised, Receipts on account of sale
of assets, or Amount received on account
of issue of Shares. Such Receipts affect
the items appearing in the Balance Sheet.
Such Receipts are not considered as
Income and hence are not included in
Profit and loss Account.
 Revenue Receipts:

 Such Receipts result from normal business

Transaction. Such receipts do not result in
reduction of Assets or increase of Liability.
Such Receipts are treated as income are
credited to Profit and Loss Account.
Examples of such receipts are receipts on
account of Interest, commission, sales,
Royalties etc.
 CAPITAL EXPENDITUREAND
REVENUE EXPENDITURE
 The following are the points of distinction
1. Benefit
 The benefit of capital expenditure is not
exhausted in year but is enjoyed for many
years. The benefit of revenue expenditure
is exhausted in a short period which is less
than the accounting period.
2. Result
 Capital expenditure results in acquisition
of an asset. Revenue expenditure is
incurred in the normal course of business
to carry on the routine business
transactions.
3. Occurrence.
 A Capital expenditure is usually non
recurring in nature. Revenue expenditure
is of a recurring nature.
4.Object.
 The object of capital expenditure is to
improve the earning capacity of the
business. Revenue expenditure is incurred
for normal business operations.
5.Improvement
 Capital expenditure is incurred to bring
improvement in the assets. Revenue
expenditure is incurred to maintain the
asset.
6. Disclosure
 Capital expenditure is disclosed in the
balance sheet. Revenue expenditure is
shown in Profit and loss account