Most of the accountants often confuse regarding capital and revenue expenditure, particular who come from non-accounting back ground. When an accountant consider revenue expenditure as capital expenditure, it will overstate the profit of the company and non-identifiable fixed assets will arise. Again, sometimes accountants may show revenue expenses as capital expenses for overstating the profit and getting incentives. On the other hand, when capital expenditure consider as revenue expenditure, it will understate the profit of the company and the fixed assets may disappear from the list and can be theft.
However, from this blog post you can normally identify the Revenue and capital expenditure, and may be able to give proper treatment in the financial statement.
What is Capital Expenditure?
A capital expenditure is the expenditure which benefit extends to more than one years. A company uses its capital expenditure to purchase, improvement or maintenance of long term assets to improve the efficiency of the company. Land, Building, Plant & Equipment, Furniture & Fixture, Patent or License are the very common example of Capital Expenditure. Capital Expenditure also known as CapEx.
All expenditures which is incurred as additional cost for the assets to ready for use also consider as capital expenditure. Say for example, the total cost of building would include the invoice price as well as legal charges and brokerage commission. Again, the cost of machinery also include the purchase price, freight, import duty, erection and installation charges. Except invoice/purchase price, all costs i.e. legal charges, brokerage commission, erection costs etc. are the additional costs which is necessary for the asset to ready for use.
Again, the expenditure which helps to generate additional earnings or increase the capacity of the business should also consider as capital expenditure. Say for example, transfer the business place from one location to another and money paid for goodwill (the right to use the name of a reputed firm) which may attract the old firm’s customer is also capital expenditure.
Extended cost of existing fixed assets also consider as capital expenditure i.e the cost of making additions to the building, furniture, machinery, motor vehicles etc.
Any expenditure which is incurred for raising capital money for business, such as commission and brokerage paid to agent for arranging long term loans, discount on issue of shares and debentures.
Any charges and commission paid for raising the loan amount also capital expenditure of the company.
Capital expenditure is shown as an asset in the balance sheet.
- The benefits of capital expenditures will incur for more than one year.
- All additional costs which make the assets ready for the use is capital expenditure.
- Legal charges, brokerage commission, erection costs, installation costs are capital expenditure.
- Money paid for goodwill purchase are also capital expenditure.
- The costs that helps to increase the capacity of the business are are also capital expenditure.
- Capital Expenditure is shown on the balance sheet .
Examples of capital expenditures:
The most commonly using capital expenditure are as follows:
- Cost of purchase of factory building and office building
- Cost of purchase of machine, furniture, motor vehicle, office equipment etc.
- Cost of goodwill, trademarks, patents, copyrights, patterns and designs
- Installation costs of plant and machinery and other office equipment.
- Additions or extension of existing fixed assets.
- Structural improvement or alterations as to fixed assets which increase the earnings capacity of the business
- Preliminary expenses of a limited company.
- Cost of issue of shares and debentures.
- Legal expenses on loans and mortgage.
- Interest on capital during construction period.
- Development expenses in case of mines and plantations.
What is Revenue expenditures?
Revenue expenditures is the item of expenditures which benefits may expire within an accounting period. These expenditure will not increase the efficiency of the business. Raw Materials, Salaries, rent & taxes, postage etc. are the some example of revenue expenditure.
The expenditure incurred for the following purposes will be treated as revenue expenditure.
- Floating assets purchase: Any expenditure relating to the purchase of floating assets are the part of revenue expenditure i.e., asset for resale purpose such as cost of merchandise, raw-material and stores required for manufacturing process.
- All establishment and other day-to-day expenses incurred in the conduct and administration of the business such as salaries, rent, taxes, postage, stationery, bank charges, insurance, advertisement charges etc.
- Maintenance of Fixed assets : Expenditure incurred to maintain the fixed assets in proper working condition such as repair, replacement and renewals of building, furniture, machinery etc.
- Revenue Expenses are considered are the part of nominal-account which benefits expires within accounting year.
- Revenue expenditure is the running expenses of the company
- Raw materials, Salary and allowances, wages payments, printing and stationery, repair of fixed assets are the common example of revenue expenses.
Examples of Revenue expenditures:
Following are the important Items of revenue expenditure:
- All expenses incurred in the ordinary conduct of business, such as rent, salaries, wages, manufacturing expenses, carriage, commission, legal charges, insurance and advertisement, free samples, salaries, postage expenses etc.
- Expenses incurred by way of repairs, renewals and replacement for the purpose of maintaining the existing fixed assets of the business in working order.
- Cost of merchandise bought for resale.
- Cost of raw-material and stores purchased for manufacturing process.
- Wages paid for manufacture of products for sale.
- Depreciation of assets used in business.
- Interest on loan borrowed for business.
- Freight and cartage paid on merchandise purchased.
- Cost of oil to lubricate machinery.
- Service to vehicle.
- Any kind of expenditure incurred in defending lawsuit regarding sale or purchase of merchandise.