All of these expenditures are incurred for the purposes of the trade and are expected to be consumed within one year. As such, revenue expenditure is charged to the Income Statement when it occurs. There is one more concept called Deferred Revenue Expenditure, It is usually treated as revenue expenditure but the benefit derived from this expenditure is not limited to one accounting year and it is of a non-recurring in nature and the expenditure is very large in amount, unlike revenue expenditure which is small. When a business purchases inventory the amount consumed is transferred to the income statement as an expense under the heading cost of sales. Capital expenditure helps in increasing the productivity or earning capacity of the company. If, however, the expense is one that maintains the asset at its current condition, the cost is deducted fully in the year the expense is incurred. In short, we will drive the benefit from these expenditures in the current year only.
For example, assume that you purchased a building which has a life is 10 years. It is my understanding that different types of expenditures have different rules for deciding if the expenditure should be capitalized. The original purchase cost of 45,000 is capital expenditure as it is expenditure on a non-current asset to be used within the business for more than one year. Calculate amount to be capitalized. The delivery and installation costs of 2,500 can also be treated as capital expenditure as they are necessary costs of bringing the machine to its present location and condition.
Expenditure on capital items may represent the acquisition of any tangible or intangible fixed assets for future benefits. Conclusion Capital Expenditure and Revenue Expenditure both are important for business for earning a profit in the present as well as in subsequent years. Capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. In accrual accounting, you recognize revenues when they're earned and expenses when they're incurred. In a nutshell, the expenditure which is done for initiate current, as well as the future economic benefit, is capital expenditure. This rule distinguishes capital expenditures from revenue expenditures by requiring them to be expensed across multiple time periods.
After 1 year somewhere the machine was cracked. But, during the 6th year, you made a major renovation of your building, by which the life of the asset has been increased for another 8 years from the year of renovation. Generally a cinema hall is decorated regular and re-decorating cost is a recurring expenditure Moreover, it will not add to the capacity of the hall, so it is a revenue expenditure. As per the accrual accounting assumption, the recognition of revenues is done when they are earned while expenditure is recognized when they are incurred. Capital Expenditure Capital expenditure relates to expenditure on non-current assets which are held for use within the business and not for resale as part of the trade of the business.
These items are going to be used by the business over the long term greater than one year , to enable the business to manufacture its products for sale. Expenditures can apply to any outflow of money for any purpose. Most revenues can be divided into cost of sales and operating expenses. If it creates an asset or reduces a liability, it is categorised as capital expenditure. Revenue expenditure is the expenditure which is incurred to carry out the normal day-to-day activities of the company. It does not appear in the balance sheet. Case Laws Bharat Gears Ltd.
It does not result in creation of assets. This satisfies the fundamental principle of Accounting i. Such expenditures are incurred on long period development programmes, real capital assets and financial assets. Repairs only restore an asset to the value it previously had, while improvements increase the value of an asset. Generally it has physical existence except intangible assets. Revenue Expenditure Revenue expenditure is expenditure which is related to the trade of the business or spent on repairing and maintaining non-current assets in order that they can continue to be used in the business. Recording in accounts The expenses made for capital items are recorded under assets side of the balance sheet.
Some costs like maintenance costs for the truck, fuel costs, repair costs, etc also come under the revenue expenditure. Generally, expenditure incurred on normal running of the government departments and maintenance of services is treated as revenue expenditure. A repairs only those damaged seats, it will be treated as revenue expenditure. The expenditure is for the long term more than one year and tends to be non-recurring, and is included in the balance sheet of the business. Additionally, its benefits will be received for some years.
Similarly, any amount spent to increase the efficiency of fixed asset is also treated as capital expenditure. Whereas the initial purchase and installation costs would be classified as capital expenditure, any subsequent repair and maintenance charges incurred in the future will be classified as revenue expenditure. The most important difference between capital expenditure and revenue expenditure is that the former is aimed at improving overall earning capacity of the concern, whereas the latter tries to maintain the earning capacity. If patent is renewed annually, then it is a revenue expenditure as it has been incurred in the ordinary course of business. Sometimes referred as revex these are used for meeting daily requirements of a business, therefore, they are short-term i. Wright has been writing since 2007.