Capital and Revenue Expenditure, Differed Revenue expenditure

1. Unit - 4
By Radhika
Faculty Member
J.H.Bhalodia Women’s College

2. Capital and Revenue
Expenditure
 All exp. and receipts of a business can broadly be divided
into two groups, viz. Capital and Revenue eg. Salary,
rent, etc. are revenue expenses and expenses on purchase
of machinery and its erection charges are capital exp.
 In preparing Final a/c….. Posting of these two will be…
 Distinction between these to should be clearly understood
else it will falsify the a/c
 Repairs to building is revenue exp. & if not treated as
revenue exp. And not charged to P & L a/c then the profit
disclosed would be more then actual one.
 Similarly money spent on purchase of furniture is a
capital exp.

3. Cont.
 If revenue exp. is treated as capital and would not charged
to P & L a/c, the profit shown in P & L a/v will be more
and dividend paid out of such profit would be treated as
dividend paid out of capital.
 Hence it is of prime importance to correctly allocate the
exp.

4. Capital Expenditure
 Any exp. Which is incurred for increasing earning
capacity of the business is capital exp.
 An exp. Which results in the acquisition of an asset to be
used in the busi. is also capital exp.
 Money spent on purchasing fixed assets
 Installation of the assets
 Money spent on putting the assets acquired into working
condition eg. Repairs to old machinery purchased
 Exp occurred at the time of purchase eg. legal charges,
stamp fees and brokerage

5. Chracteistics
 Not Recurring in nature
 Results in the acquisition of assets in permanent nature
 Busi. Get benefits for a long duration
 Used for the purpose of earning revenue

6. Revenue Expenditure
 Exp incurred in running the busi. and in maintaining the
earning capacity of the business are considered as
Revenue exp.
 Such exp. Of recurring nature eg. Salary and rent have to
be paid every month
 Similarly exp of maintaining the assets in efferent
working conditions which does not increase the earning
capacity eg. Repairs and renewal of machinery

7. Cont.
 Cost of raw materials or stores consumed in manufacture
 Manufacturing exp. Eg. Wages
 Admin. Exp of busi. Eg. Salary, postage, printing and
stationery
 Selling and distribution exp. Eg. Advertising,commission
 Exp of financial nature. Eg. Inerest on loan, BOD
 Repairs and maintance exp.
 Depreciation on assets.

8. Differed Revenue
Expenditure
 The exp. Which is primarily of revenue nature benefit
where of is not exhausted in the year in which it is
incurred are known as Deferred Revenue Expenditure.
 Such exp. are not charged to revenue in the year in which
they are incurred, but a part of such exp. is written off
every year and the balance is temporarily capitalized and
is shown in the Balance sheet till it is completely written
off.
 Eg. Advertising, preliminary exp., discount on shares and
debentures