Rules for Determining Capital and Revenue Expenditure

Rules for Determining Capital Expenditure:

If expenditure is incurred for the following purposes, it can be recognized as capital expenditure:

  1. The cost of purchasing fixed assets is capital expenditure. For Example purchase of furniture, purchase of equipment, etc.
  2. The cost incurred to increase the efficiency, usability, or mobility of old or new assets is capital expenditure. For example, the cost of installing the equipment should be added to the total purchase price of the equipment.
  3. Any expenditure incurred in any financial year but of which the benefits last more than one year shall be recognized as capital expenditure. For example, $50,000 has been spent on advertising this year, which will last for five years. In this case, if the first-year advertising cost is taken as ($50,000/5) = $10,000, then, for the remaining 4 years, $40,000 will be considered as a deferred advertisement, which is treated as a capital expenditure.
  4. Costs incurred to increase the earning capacity of business are considered to be capital expenditure. For example, if a factory is relocated for easy access to raw materials, the cost of relocation of that factory is capital expenditure.
  5. The cost of raising business capital is the cost of capital. For example, at the time of the sale of shares, the broker’s commission is considered to be capital expenditure.

Examples of Capital Expenditure:

  • Acquisition of land, buildings, vehicles, Vessels, machinery, furniture, etc.
  • Cost of leasehold land and building.
  • Cost of purchased goodwill.
  • Preliminary expenditure.
  • Expenditure for additions or extensions to current assets.
  • Second-hand machines overhaul costs.
  • Expenditure on putting the asset into working condition and
  • Cost incurred to increase the earning capacity of a business.

Rules for Determining Revenue Expenditure:

If expenditure is incurred for the following purposes, it can be recognized as revenue expenditure:

  1. Any expenditure incurred in carrying out day-to-day operations of the organization shall be treated as revenue expenditure. Such as rent, wages, electricity, and transport costs, etc.
  2. Expenditure on the maintenance of fixed assets will be treated as revenue expenditure. For example, repair & maintenance costs.
  3. The cost of goods purchased for sale shall be treated as revenue expenditure. For example, the purchase of goods for sale is $20,000, which is revenue expenditure.
  4. Purchasing a fixed property for sale is a revenue expenditure. For example, buying furniture for sale is recognized as a revenue expense.
  5. All types of installation and other expenses for the normal functioning of the business shall be recognized as revenue expenditure. Such as administrative expenses, selling expenses, etc.

Examples of Revenue Expenditure:

  • Salaries and wages paid to the employees;
  • Factory or office premises rent and rates;
  • Depreciation on fixed assets (plant and machinery, Building, Vehicle, Vessels, etc.)
  • Consumable stores;
  • Selling and advertisement expenses
  • Insurance premium;
  • Taxes and legal expenses; and
  • Miscellaneous expenses.

You can also read:

  1. Concept of Capital and Revenue Transactions
  2. Concept of Revenue Transactions
  3. Difference between Event and Transaction

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