TOPIC: CAPITAL EXPENDITURE AND REVENUE EXPENDITURE
Capital Expenditure
Capital
expenditure can be defined as expenditure incurred on-
1.
The purchase of fixed assets, For example, the purchase of a car to be use to
deliver goods is capital expenditure.
2.
Alteration or improvement of fixed assets.
Rules for Determining Capital Expenditure
Rule 1:-
An expenditure incurred for the purpose of acquiring long term assets (useful
life is at least more than one accounting period) for use in business to earn
profits and not meant for resale, will be treated as a capital expenditure.
For example,
if a second hand motor car dealer buys a piece of furniture with a view to use
it in business, it will be a capital expenditure. But if he buys second hand
motor cars, for re-sale, then it will be revenue expenditure because he deals
in second hand motor cars.
Rule 2:-
When expenditure is incurred to improve the present condition of a machine or putting
an old asset into working condition, it is recognised as a capital expenditure.
The expenditure is capitalized and added to the cost of the asset. Likewise,
any expenditure incurred to put an asset into working condition is also a
capital expenditure. • For example, if one buys a machine for Rs. 5,00,000 and
pays Rs. 20,000 as transportation charges and Rs. 40,000 as installation
charges, the total cost of the machine comes up to Rs. 5,60,000.
Similarly,
if a building is purchased for Rs. 1,00,000 and Rs. 5,000 is spent on
registration and stamp duty, the capital expenditure on the building stands at
Rs. 1,05,000.
Rule 3:- If expenditure
is incurred, to increase earning capacity of a business will be considered as
of capital nature. For example, expenditure incurred for shifting the factory
for easy supply of raw materials. Here, the cost of such shifting will be a
capital expenditure.
Rule 4:-
Preliminary expenses incurred before the commencement of business is considered
capital expenditure.
For example,
legal charges paid for drafting the memorandum and articles of association of a
company or brokerage paid to brokers, or commission paid to underwriters for
raising capital.
Treatments of Capital Expenditures
·
Capital expenditures are
shown in the Balance Sheet Assets Side.
·
When we do journal entries
for capital expenditures than we will add full cost in value of machine.
Ex: -
if a building is purchased for Rs. 1,00,000 and Rs. 5,000 is spent on
registration and stamp duty, the capital expenditure on the building stands at
Rs. 1,05,000
Building
A/c Dr. 105000
To Cash a/c 105000
Some examples of capital expenditure:
(i)
Purchase of land, building, machinery or furniture;
(ii)
Cost of leasehold land and building:
(iii)
Cost of purchased goodwill:
(iv)
Preliminary expenditures;
(v)
Cost of additions or extensions to existing assets:
(vi)
Cost of overhauling second-hand machines:
(vii)
Expenditure on putting an asset into working condition, and
(viii)
Cost incurred for increasing the earning capacity of a business
Revenue Expenditures
Revenue
expenditure is expenditure incurred in the running/management of the business.
For example,
the cost of petrol or diesel for cars is revenue expenditure.
Rules for Determining Revenue Expenditure
Any
expenditure which cannot be recognised as capital expenditure can be termed as
revenue expenditure. Revenue expenditure temporarily influences only the profit
earning capacity of the business
Rule 1:-
Expenditure for day-to-day conduct of the business, the benefits of which last
less than one year.
Examples
are wages of workmen, interest on borrowed capital, rent, selling expenses, and
so on.
Rule 2:-
Expenditure-
ü on
consumable items,
ü on
goods and services for resale either in their original or improved form.
Examples
are purchases of raw materials, office stationery, and the like.
Rule 3:-
Expenditures incurred for maintaining fixed assets in working order.
For example, repairs, renewals and depreciation.
Some examples of revenue expenditure
(i)
Salaries and wages paid to the employees;
(ii)
Rent and rates for the factory or office premises;
(iii)
Depreciation on plant and machinery;
(iv)
Consumable stores;
(v)
Inventory of raw materials, work-in-progress and finished goods;
(vi)
Insurance premium:
(w)
Taxes and legal expenses, and
(viii)
Miscellaneous expenses.
Treatments of Revenue Expenditures
§ Revenue
Expenditures are shown in the Trading and Profit And Loss Account debit side.
§ When
we make journal entries of revenue expenditure transaction than it will Show as
separate expenditure, not add in cost of assets.
-Repair
expenditure on machinery Rs 1,000
Repair
a/c Dr. 1000
To Cash a/c 1000
Treatment of Revenue Expenditure as Capital
Expenditure:
The
following are some of the instances where an item expenditure will be treated
as capital expenditure
1. Repairs:
Repairs expenditure is revenue in nature, but huge amount incurred on a second
hand machinery in order to bring it to working condition can be treated as
capital expenditure and should be added to the cost of Machinery
2. Wages:
Normally, wages are revenue in nature. But wages paid to the workers for the
construction or installation of fixed assets, will be treated as capital
expenditure and added to the cost of that asset.
3. Preliminary Expenses:
All the expenses paid in the process of formation of a company should be
treated as capital expenditure and recorded in the balance sheet on asset side.
4. Brokerage, Government Stamp Duty and Legal
Expenses: All the expenses paid on the purchase of a
property will be regarded as capital expenditure.
5. Raw Materials and Stores:
These are generally revenue in nature, but if raw materials and stores consumed
in the making of a fixed asset, the same should be treated as capital
expenditure.
6. Development Expenditure:
All the expenditure incurred for the development of mines and plantations
should be treated as capital expenditure.
MCQ OF CAPITAL AND REVENUE EXPENDITURES
1. An
expenditure is capital in Nature when –
a) The
receiver of the amount is going to treat it for the purchase of fixed assets.
b) It
increase the quantity of fixed assets
c) It
is paid as interests on loans for the business
d) It
is maintains a fixed assets
2.
Capital expenditures are recorded in the-
(a)
Balance sheet
(b)
Profit and loss A/c
(c)
trading a/c
(d)
manufacturing a/c
3.
Which of the following transaction is of capital nature
(a)
Purchases of a truck
(b)
Replacement of old trucks
(c)
Cast of repairing of truck
(d)
all of the above
4.
Rs. 10,000 incurred for up gradation of computer by installation of 8GB Ram is
(a)
Capital expenditure
(b)
Deferred revenue expenditure
(c)
Revenue expenditure
(d)
None of the above
5.
Cost of goods purchased for resale is an example of
(a)
Capital expenditure
(6)
Revenue expenditure
(c)
Deferred revenue expenditure
(d)
None of these
6.
Import duty of raw material purchased
(a)
Revenue expenditure
(b)
Capital expenditure
(c)
Deferred revenue expenditure
(d)
None of these
7.
Received from soloman by co., an invoice for Rs. 1500 for repairs to factory
walls
(a)
Revenue expenditure
(b)
Capital expenditure
(c)
Deferred revenue expenditure
(d)
None of these
8.
Company received from government for compulsory acquisition of land
(a)
Revenue expenditure
(b)
Capital expenditure
(c)
Deferred revenue expenditure
(d)
None of these
9.
All revenue receipts and expenditures are shown in: -
(a)
Balance Sheet
(b)
Trading and Profit and Loss A/c
(c)
Cash Flow Statement
(d)
Statement of Affairs
10.
A bad debt recovered during the year will be
(a)
Capital expenditure
(b)
Revenue expenditure
(c)
Capital Receipt
(d)
Revenue Receipt
11.
Insurance claim received on account of machinery damaged completely by fire is
(a)
Capital Receipt
(b)
Revenue receipt
(c)
Capital expenditures
(d)
Revenue Expenditure
12.
Amount of Rs. 5,000 spent as lawyers' fees to defend a suit claiming that the
firm's factory site belonged to the plaintiff's land is
(a)
Capital expenditures
(b)
Revenue Expenditure
(c)
Deferred revenue expenditures
(d)
None
13.
Money spent Rs.10,000 as travelling expenses of the directors on trips abroad
for purchase of capital assets is
(a)
Capital expenditures
(b)
Revenue Expenditures
(c)
Deferred revenue expenditures
(d)
None (CBSE UGC NET June 13 Paper 2)
14.
Insurance expenses paid to bring an equipment from the place of purchase to the
place of installation is a type of –
(A)
Capital expenditure
(B)
Revenue expenditure
(C)
Deferred revenue expenditure
(D)
Operating expense
(CBSE
UGC NET June 13 Paper 2)
15.
Which one of the following statements is true?
(A)
Capital expenditure does not affect the profitability of a concern but revenue
expenditure does.
(B)
Capital expenditure affects the profitability of a concern directly but revenue
expenditure does not
(C)
Capital expenditure affects the profitability of a concern indirectly but
revenue expenditure affects directly
(D)
Both capital expenditure and revenue expenditure affect the profitability of a
concern directly.
(KEARLA
SET - June 13 Paper 2)
16.
Wages paid to a worker for installing machinery is:
A)
Debited to Wages a/c
B)
Debited to Installation expenses a/c
C)
Debited to Machinery a/c
D)
Debited to Salary a/c
(KEARLA
SET - June 13 Paper 2)
17.
Subsequent expenditure that extends the useful life, improve quality of output
or reduce operating cost of an existing asset beyond its originally estimated
levels is:
A)
Capital expenditure
B)
Revenue expenditure
C)
Deferred revenue expenditure
D)
None of these
(KEARLA
SET June 13 Paper 2)
18.
In conventional accounting, the amount spent on human resources is taken as---
A)
Capital expense
B)
Revenue expense
C)
Deferred revenue expense
D)
Revenue and deferred revenue expense
0 Comments