DEPARTMENT OF HUMANITIES

Accountancy
M4

Samitesh Brahma
Assistant Professor
Department of Humanities
Jorhat Engineering College
Module 4
✔Capital expenditure
✔Revenue expenditure
Capital Expenditure
Any expenditure which is incurred in acquiring or
increasing the value of a fixed asset is termed as
capital expenditure
As such, the amount spent on the purchase of Land
and Building, Plant and Machinery, furniture, etc. is
capital expenditure.
Such expenditure yields benefit over a long period and
hence is written in Assets.
Examples of Capital expenditure
1. Expenditure which results in the acquisition of a fixed asset
such as land, building , plant, motor vehicles, etc.
2. Expenditure in connection with the purchase of a fixed asset
such as wages paid to workers.
3. Expenditure which results in the extension or improvement
of fixed assets and which increases the earning capacity of
such assets.
4. Expenditure incurred for establishing the business.
5. Expenditure incurred on the purchase of second-hand asset
and on putting such asset into working condition.
Revenue Expenditure
Any expenditure, the benefit of which is received
during the current year itself is termed as revenue
expenditure.
As such, all the revenue expenditures are debited to
Trading and Profit & Loss account.
Such expenditure does not result in an increase in the
earning capacity of the business but only helps in
maintaining the existing earning capacity.
Examples of Revenue Expenditure
1. Expenses incurred for the purpose of day to day running of
business such as manufacturing expenses, office expenses,
selling expenses.
2. Expenses incurred on the ordinary repairs and maintenance
of fixed assets.
3. Payment for goods purchase for resale.
4. Depreciation on fixed assets.
5. Replacement of worn-out part of an existing machine.
6. Loss from sale of fixed assets.
Distinction between capital expenditure and revenue expenditure

Basis of Distinction Capital Expenditure Revenue Expenditure

1. Purpose It is incurred for the acquisition of a It is incurred for the day-to-day
fixed asset for use in business. running of the business
2. Earning capacity It increases the earning capacity of It is incurred for maintaining the
the business earning capacity
3. Period Its benefit extends to more than one Its benefit is exhausted within a
year maximum period of one year
4. Accounting treatment It is debited to related Asset It is debited to related Expenses
account account
5. Nature of account It is a real account It is a nominal account
6. Presentation It is shown in the balance Sheet It is shown in the Trading or Profit
and Loss account
7. Examples Purchase of fixed assets like plant Rent, salaries, repairs, depreciation,
and machinery etc.
Illustration 1
Classify the following into Capital and Revenue Expenditure,
stating reasons in each case.
1. ₹50,000 paid for the installation of a new machine.
2. Payment of annual taxes ₹20,000 and annual insurance of ₹
10,000.
3. Wages paid to workers for converting raw material into
finished goods.
4. A sum of ₹40,000 was spent in overhauling its entire plant
which resulted in adding five years to its useful life.
5. ₹10 Lac spent on the construction of railway sidings
Solution
1. Cost of installing the machine is a capital expenditure.
2. Annual taxes and insurance premium are Revenue Expenditure
because their benefit will be exhausted within the year.
3. It is revenue expenditure since it is incurred in the ordinary course of
business.
4. It is capital expenditure since it has resulted in increase of the
working life of the asset.
5. It is capital expenditure as asset is created which will be used for a
number of years.