Distinction between Capital and Revenue Expenditure
The benefit of the expenditure are expected to accrue for a long time, the
expenditure is Capital Expenditure. These expenditures serve the purpose of
increasing the capacity or capabilities of the long term asset by either enhancing
Examples of capital expenditure are land, building, machinery, patents etc. All these
things stay with the business and can be used over and over again. Other examples
are: money paid for goodwill (the right to use the established name of an outgoing
firm) since it will attract the old firm’s customers and thus, results in higher sales
and profits; money spend to reduce working expenses, for example, conversion of
hand-driven machinery to power- driven machinery and expenditure enabling a firm
to produce a large quantity of goods.
An item of expenditure whose benefit expires within the year or expenditure
which mere seeks to maintain the business or keep assets in good working condition
is Revenue Expenditure. Examples are: salaries and wages, fuel used to drive
machinery, electricity used to light the factory or offices, etc.
The following items of expenditure seem to be revenue expenditure, but in
actual practice these are treated as capital expenditure, since they lead to the business
being established and run efficiently:
(a) Expenses for the formation of a company – preliminary expenses.
(b) Cost of issuing shares and debentures and raising loans, such as legal expenses
underwriting commission etc.
(c) Interest on capital up to the point production is ready to commence, where the
nature of business is such that construction work must go on for a long period
before production can start.
(d) Expenses on acquisition and installation of assets: for example, legal fees to
acquire property, or expenses incurred to renovate machinery bought
secondhand or wages of workmen who install machinery.
Deferred Revenue Expenditure
In some cases, the benefit of a revenue expenditure may be available for a
period of two or three or even more years. Such expenditure is known as “Deferred
Revenue Expenditure” and is written off over a period of a few years and not wholly
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The benefit of the expenditure are expected to accrue for a long time, the
expenditure is Capital Expenditure. These expenditures serve the purpose of
increasing the capacity or capabilities of the long term asset by either enhancing
Examples of capital expenditure are land, building, machinery, patents etc. All these
things stay with the business and can be used over and over again. Other examples
are: money paid for goodwill (the right to use the established name of an outgoing
firm) since it will attract the old firm’s customers and thus, results in higher sales
and profits; money spend to reduce working expenses, for example, conversion of
hand-driven machinery to power- driven machinery and expenditure enabling a firm
to produce a large quantity of goods.
An item of expenditure whose benefit expires within the year or expenditure
which mere seeks to maintain the business or keep assets in good working condition
is Revenue Expenditure. Examples are: salaries and wages, fuel used to drive
machinery, electricity used to light the factory or offices, etc.
The following items of expenditure seem to be revenue expenditure, but in
actual practice these are treated as capital expenditure, since they lead to the business
being established and run efficiently:
(a) Expenses for the formation of a company – preliminary expenses.
(b) Cost of issuing shares and debentures and raising loans, such as legal expenses
underwriting commission etc.
(c) Interest on capital up to the point production is ready to commence, where the
nature of business is such that construction work must go on for a long period
before production can start.
(d) Expenses on acquisition and installation of assets: for example, legal fees to
acquire property, or expenses incurred to renovate machinery bought
secondhand or wages of workmen who install machinery.
Deferred Revenue Expenditure
In some cases, the benefit of a revenue expenditure may be available for a
period of two or three or even more years. Such expenditure is known as “Deferred
Revenue Expenditure” and is written off over a period of a few years and not wholly
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