VARIOUS TYPE OF EXPENDITURE
What is Capital Expenditure ?
Capital expenditure consists of expenditure the benefit of which is not fully consumed in one accounting period but spreads over several periods.It is therefore of non-recurring nature it includes expenses incurred.
For acquiring fixed assets e.g.,land,building,plant,furniture etc.which are held not for re-sale but for the purpose of long term use in the buisness.
For making additions to existing fixed assets,e.g.,cost of a new factory shed;
For increasing the income earning capacity of the buisness either by reducing cost or by increasing productivity;e.g.,cost of replacing a petrol driven engine by a diesel engine.
For acquiring a benefit of an enduring nature or a valuable right e.g., cost of acquiring goodwill,patent right or copy right.
All items of capital expenditure appear on the assets side of the Balance Sheet.
What is Revenue Expenditure ?
Revenue Expenditure consists of expenditure incurred in one accounting period and full benefit of which is also consumed in the same period.Therefore,it is normally of reccuring nature.Such an expenditure does not increase the earning capacity of the buisness nor does it bring into existence an assets of an enduring nature.It includes expenses inccured
For acquiring assets for re-sale at a profit or for conversion into finished products,e.g.,cost of goods and raw material;For maintaining fixed assets in good working order,e.g.,normal repairs and renewals of plant,white washing of building,replacement of spare parts of machinery etc;
For keeping the organisation going e.g.,rent,rates and taxes wages and salaries carriage,insurance and other trade charges.
All items or revenue expenditure appear in the Trading and Profit Loss Account or some other form of revenue accounts.
Failure to distinguish clearly between Capital Expenditure and Revenue Expenditure vitiates the results shown by the accounts.Thus,an item of Capital Expenditure charged to a revenue account incorrectly results in the profits loss account showing a balance of profit smaller than the actual amount.Similarly,expenditure of revenue nature debited in error to a capital (assets) account inflates the profit shown by the Profit Loss Account.Besides,the resulting balance sheet would also be incorrect.
What is Capitalished Expenditure ?
An expenditure which is primarily of revenue nature,but incurred for the purpose of acquiring any assets or adding to its value id termed as Capitalised Expenditure.Examples of Capitalised expenditure are-
Repairs-Initial repairing charges incurred on purchase of a second-hand plant are capitalised and added to the cost of plant.
Material and wages-Materials consumed and wages paid on the construction of a building or erection of a machinery are capitalised and added to the cost of building or machinery.
Carriage-Carriage paid on any plant and machinery acquired for use in the buisness is capitalised and considered as part of the cost of plant and machinery.
Legal expenses-Legal expenses incurred in connection with the purchase of land and building are added to the cost of land and building.