Income & revenue expanditure

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Income & revenue expanditure

  1. 1. B.Sc.in HOSPITALITYand HotelADMINISTRATION(B.Sc. In H&HA) Accountancy Sem 2 nd
  2. 2. CLASSIFICATION OF EXPENDITUREExpenditure can be classified into three categories:Capital ExpenditureRevenue ExpenditureDeferred Revenue ExpenditureCapital expenditure: Capital expenditure is thatexpenditure which result in acquisition of an asset andcan later be sold and converted into cash or whichresults in an increase in the earning capacity of abusiness. Another test of a capital expenditure is thatthe benefit of such expenditure lasts for a long period oftime.
  3. 3. Following are some of the examples of capital expenditure:a) Cost of fixed or permanent assets, such as lands, buildings, machinery, patent rights, vehicles, furniture, loose tools, etc., purchased for use in business are capital expenditure.b) Cost of additions or extensions to existing fixed assets, such as costs of addition to machinery, costs of extensions to buildings, etc., are capital expenditure.c) Any expenditure incurred in connection with the acquisition, (i.e., purchase) of fixed assets is a capital expenditure. For example, legal charges and brokerage paid for acquiring land and buildings are capital expenditure.d) Any expenditure incurred in bringing the assets purchased to the business is a capital expenditure. For example, carriage or freight paid for bringing the machinery purchased is a capital expenditure.
  4. 4. e) Any expenditure incurred in installing the fixed assets isa capital expenditure. For example, charges incurred on theerection of machinery or charges incurred in the fixing offans are capital expenditure.f) Any expenditure incurred on the alternations andimprovements of existing fixed assets so as to increasetheir income earning capacity is treated as a capitalexpenditure. For example, a large amount spent on auseless machine so as to make useful is treated as capitalexpenditure because it increases the revenue earningcapacity of the fixed asset.g) Development expenditure (i.e., amount spent on anasset before it has started yielding) is a capital expenditure.For instance , amount spent on a tea estate or rubberestate before, it has started yielding is a capitalexpenditure.
  5. 5. REVENUE EXPENDITURE: An expenditure that arises out ofand in the course of regular business transactions of aconcern is termed as revenue expenditure. In other words,expenses whose benefit expires within the year ofexpenditure and which are incurred to maintain the earningcapacity of existing assets are termed as revenueexpenditure. These expenses are recurring in nature.Following are few examples of revenue expenditure:a) Cost of goods purchased for resale is revenue expenditure.b) Expenses, such as carriage, freight, etc., incurred in bringing the goods purchased to the place of business are revenue expenditure.c) Cost of material consumed in the manufacture of goods for meant for resale is revenue expenditure.
  6. 6. d) Expenses incurred in manufacturing goods for resale arerevenue expenditure, e.g., wages, power, factory rent,insurance, factory heating, etc.e) Expenses incurred for the day-to-day management of thebusiness are revenue expenditure, e.g., salaries, rent, lawcharges, bank charges, printing and stationery, postage andtelegrams, etc.f) Expenses incurred for selling the products are revenueexpenditure, e.g., advertisement, commission paid, carriageoutward, bad debts, etc.g) Any expenditure which is incurred for maintaining thefixed assets in good working order or condition is revenueexpenditure, i.e., repairs, replacements and renewals offixed assets.h) Interest on loan borrowed, interest on deposits accepted,interest on capital, discount allowed, etc., are revenueexpenditure.
  7. 7. DIFFERENCES BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURES. No. CAPITAL EXPENDITURE REVENUE EXPENDITURE1. Capital expenditure is incurred Revenue expenditure is incurred for acquiring fixed assets intended for acquiring or producing goods for use in the business, and not for meant for sale. resale. 2. Capital expenditure is incurred Revenue expenditure is incurred for extending or improving the for maintaining the fixed assets existing fixed assets. in a good working order. 3. Capital expenditure adds to the Revenue expenditure does not revenue earning capacity of a add to the revenue earning concern. capacity of a concern. 4. The benefits of capital expenditure Revenue expenditure will extend to more than one year. decrease the value of net assets. 5. Capital expenditure will increase The benefit of revenue the value of net assets. expenditure is confined to only 6. Capital expenditure is non- one year. recurring. Revenue expenditure is 7. Capital expenditure will go to the recurring. Balance sheet. Revenue expenditure will go to the Trading Account or Profit and Account.

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