CAPITAL EXPENDITURE AND REVENUE EXPENDITURE

Capital Expenditure

This is an expenditure from which the business organization will derive benefits for more than one year.

Capital expenditure is incurred when a business spends money either to

–         Buy fixed assets or

–         Add to the value of existing fixed asset.

For instance, money spent on the following are capitalized.

– Acquiring of fixed assets

– Bringing them into the premises

– Legal cost of buying buildings

– Any other cost needed to get a fixed asset ready for use for the first time.

Being capitalized means that such expenditure should not be completely charged to profit and loss account in the year it occurred but is held in the balance sheet and charged in bits to profit and loss account over a number of years on some rational basis, as depreciation / provision for depreciation.

Revenue Expenditure:

This is an expenditure the full benefit of which are used up within one year. Or expenditure which is not spent on increasing the value of fixed assets, but is incurred in running the business on a day – to –day basis.

It is completely charged to the profit and loss account as an expense in the year that it occurred. However, some fixed assets may be charged as expense to profit and loss in full in the year they occurred due to their immaterial nature (insignificant amount).

Example of capital and revenue expenditure:

1. Buying of van                                             Capital
2. Petrol cost for van                                      Revenue
3. putting extra head lamp                             Capital
4. Repairs to the van                                      Revenue
5. Painting the outside of a new building        Capital
6. Repainting the building exterior after some years          Revenue

Some times it may be difficult to decide which expenditure is capital or revenue. In such instances apply the following rules.

1. If the expenditure is directly incurred in bringing a fixed asset into use for the first time, it is capital expenditure.
2. IF the expenditure improves a fixed asset (by making it superior to what it was when it was first bought by the organization e.g. building an extension to a warehouse). It is capital expenditure
3. All other expenditures are revenue expenditure.

Capital and Revenue Receipts

When an item of capital expenditure is sold, the receipt is called capital receipt. E.g. money received from selling motor van that has been in used.

Revenue receipts are sales and other revenue items that are added to gross profit, such as rent receivable and commission receivable.