MEANING AND PURPOSE OF CAPITAL EXPENDITURE

Capital expenditure is that expenditure, the benefit of which is enjoyed, not only in the year in which such expenditure is incurred but over many years. Such expenditure usually results in purchase or acquisition of assets and properties which may be used for many years.

The main purpose of such an expenditure is to increase the earning capacity of the business. For example Purchase of Plant and machinery, land and building etc is a capital expenditure. Capital expenditure is shown in the balance sheet.

The features of capital expenditure are:1. The benefit of such an expenditure is not exhausted in one year but the benefit of such an expenditure is enjoyed for a longer period. 2. Such an expenditure is of a nonrecurring nature. It does not occur regularly. 3. The amount spent on such an expenditure is generally large but not always large.

Expenditure incurred for the following purpose is capital expenditure: 1. Purchases of assets such as plant and machinery, Land and Building. 2. Expenditure incurred on an old asset bought to put it in a working condition. For example repairs expenditure incurred on an second hand machine bought.

3. Expenditure incurred for putting a new asset to use e.g. installation charges for Machine. 4. Expenditure incurred so it becomes economical to operate a asset, thereby reducing the cost of operation. For example converting a petrol engine taxi in to a diesel engine taxi.

5. Expenditure incurred on extension or improvement of an asset, so as improve the earning capacity of the business. e.g. expenditure incurred on converting a 35MM screen in to 70 MM screen. 6. Expenditure incurred for acquiring a benefit of a permanent nature or a valuable right e.g. expenditure incurred for acquiring patent rights.

7. Expenditure incurred on improving the existing fixed assets. However expenditure incurred on maintaining fixed asset is a revenue expenditure.

MEANING AND PURPOSE OF REVENUE EXPENDITURE

Following are the features of revenue expenditure. 1. The benefit of such an expenditure is exhausted in a short period which is less than the accounting period. 2. Such an expenditure is incurred to carry on day to day business activities. 3. Such an expenditure is a recurring expenditure

4. Such an expenditure may be incurred to maintain the assets. 5. The amount of such expenditure is generally small, but not always small. 6. Such an expenditure is shown in profit and loss account.

Revenue expenditure may be incurred for the following purposes. 1. Expenditure for purchasing the goods for resale or using them in manufacturing. 2. Expenditure incurred on maintaining and operating the asset. 3. Expenditure incurred on protection of business.

MEANING OF DEFERRED REVENUE EXPENDITURE

All expenditure incurred for carrying on the normal business activity is known as revenue expenditure. The benefit of such expenditure is enjoyed in the year in which it is incurred. However, sometime a heavy revenue expenditure may be incurred in one year such that its benefit of it may arise or enjoyed not in one year but also in the following two or more years.

So much of revenue expenditure which is likely to benefit in future is called deferred revenue expenditure. Consider Advertisement expenditure. Normal Advertisement expenditure incurred is a revenue expenditure which is written off to profit and loss account. However, heavy expenditure incurred on advertisement for launching a new product may benefit for two or more years.

In such a case, so much of the expenditure which benefits the current year can be treated as revenue expenditure, and debited to profit and loss account and the balance may be carried forward as Deferred revenue expenditure, i.e., the revenue expenditure which is postponed.

Capital Receipts are those receipts which are non-recurring in Nature. Such receipts usually result on account of Sale of Asset or Increase in Liability. Examples of Such Receipts are Amount of Loan raised, Receipts on account of sale of assets, or Amount received on account of issue of Shares. Such Receipts affect the items appearing in the Balance Sheet. Such Receipts are not considered as Income and hence are not included in Profit and loss Account.

Capital Receipts

Revenue Receipts:

Such Receipts result from normal business Transaction. Such receipts do not result in reduction of Assets or increase of Liability. Such Receipts are treated as income are credited to Profit and Loss Account. Examples of such receipts are receipts on account of Interest, commission, sales, Royalties etc.

CAPITAL EXPENDITUREAND REVENUE EXPENDITURE

The following are the points of distinction 1. Benefit The benefit of capital expenditure is not exhausted in year but is enjoyed for many years. The benefit of revenue expenditure is exhausted in a short period which is less than the accounting period. 2. Result

Capital expenditure results in acquisition of an asset. Revenue expenditure is incurred in the normal course of business to carry on the routine business transactions. 3. Occurrence. A Capital expenditure is usually non recurring in nature. Revenue expenditure is of a recurring nature.

4.Object. The object of capital expenditure is to improve the earning capacity of the business. Revenue expenditure is incurred for normal business operations. 5.Improvement Capital expenditure is incurred to bring improvement in the assets. Revenue expenditure is incurred to maintain the asset.

6. Disclosure Capital expenditure is disclosed in the balance sheet. Revenue expenditure is shown in Profit and loss account