JAIIB AFB Unit 11 - Capital and Revenue Expenditure

A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense. Even significant repairs that do not extend the life of the asset or do not improve the asset (the repairs merely return the asset back to its previous condition) are revenue expenditures.

Difference between Capital and Revenue Expenditure

CAPITAL	REVENUE
Large amount	Relatively small
Improve or enhance earning capacity	Maintain asset
Long duration benefit	Short duration
Non- recurring	Recurring
Balance sheet item	Trading /P & L A/c item

 

Capital and Revenue Expenditure : Examples

1. Cost of replacement of defective parts of the machinery is ……

1. Capital expenditure
2. Revenue expenditure
3. Deferred revenue expenditure

2. Loss of goods due to fire Rs.8000 is a revenue expenditure because……

1. It is recurring
2. Amount involved is small
3. Loss is arising out of business operations

3. Preliminary expenses , discount allowed on issue of shares are the examples of

1. Capital expenditure
2. Deferred revenue expenditure
3. Revenue expenditure

4. Expenditure incurred in acquiring the patents rights for the business is an example of ----

1. Capital expenditure
2. Deferred revenue expenditure
3. Revenue expenditure