CAPITAL AND REVENUE NOTES

CAPITAL AND REVENUE NOTES covers the topic of Difference between Capital and revenue expenditure and Difference between Capital and Revenue receipts.

QUESTION: What do you understand by capital and revenue expenditure? Explain the difference between these two?

OR

QUESTION: “Capital expenditure is different from revenue expenditure.” Explain

CAPITAL EXPENDITURE

The expenditure incurred by the business enterprise for the purchase of fixed assets or to repay the loan is known as Capital expenditure. This is the expenditure, the benefit of which accrues to the firm for the long time. This expenditure is also done to increase the capacity, efficiency, life span or economy of an existing fixed asset. These expenditures are posted to the Balance Sheet.

ACCORDING TO WLLIAM PICKLES

“Capital expenditure may be regarded as an outlay resulting in the increase or acquisition of asset or increase in the earning capacity of a business.

The following are regarded as capital expenditure:

• Expenditure incurred on acquiring the fixed assets as land and building, machinery, furniture etc.
• The expenditure incurred on purchase, receipt and installation of fixed assets.
• The expenditure spent for acquiring the right to carry on the business.
• The amount spent for an extension and improvement of fixed asset.
• The expenditure for the acquisition of intangible asset.
• Any legal expense incurred for defending case for protection of fixed asset, rights etc are also known as capital expenditure.

REVENUE EXPENDITURE

The amount spent to conduct the regular business activities is known as revenue expenditure. The benefit of this expenditure is received fully during an accounting period. All the revenue expenditures are debited to Trading and Profit and Loss account. These expenditures do not result in increasing the earning capacity of the business but only helps in maintaining the existing earning capacity.

ACCORDING TO WILLIAM PICKLES

“’Revenue expenditure is such outlay which is necessary for the maintenance of earning capacity including the upkeep of fixed assets in a fully efficient state and the normal cost involved in setting, including the cost of goods and services of the business to which it relates.”

The following are regarded as Revenue Expenditure:

• Expenditure on purchase of stationery, postage and stamps etc.
• Expenditure on maintenance of asset i.e. normal repairs.
• Expenditure like Rent paid, Wages and Salaries paid, Insurance paid etc.

DIFFERENCE BETWEEN CAPITAL AND REVENUE EXPENDITURE

The capital and revenue expenditure are differentiated to

• Ascertain the true or fair net profit.
• Meet the requirements of income tax provisions.
• Find out the true and fair position of the business.
• Maintain the record on the scientific basis or as per the rules of double entry system.

ACCORDING TO RANDALL SCOTT

“Briefly anything which is used up in the ordinary course of trading is revenue expense, whereas anything keep for the permanent use of the business for a number of years may be regarded as fixed asset and capital expenditure.”

ACCORDING TO G WILKINSON

“Capital expenditure is the expenditure on fixed assets i.e. Land, Buildings, Machinery etc. Revenue expenditure is expenditure on items of resale and for immediate use i.e. stationery, rent etc.”

The brief difference between capital and revenue expenditure is as follows:

BASIS OF DIFFERENCE	CAPITAL EXPENDITURE	REVENUE EXPENDITURE
MEANING	The expenditure incurred in acquiring a capital asset or improving the capacity of an existing one, resulting in the increase of life span.	The expenditure incurred in running day to day operations is known as revenue expenditure.
TERM	This expenditure is done for long term.	This expenditure is done for short term.
AMOUNT	The amount of expenditure is large.	The amount of expenditure is relatively small.
CAPITALIZATION	The amount of expenditure is capitalized.	The amount of expenditure is not capitalized.
SHOWN IN	This expenditure is shown in Balance Sheet.	This expenditure is shown in Income Statement i.e. Profit and Loss Account.
OUTLAY	This expenditure is non- recurring in nature.	This expenditure is recurring in nature.
BENEFIT	The benefit is incurred for more than one year.	The benefit is enjoyed in current accounting year only.
EARNING CAPACITY	This expenditure is done to improve the earning capacity.	This expenditure is done to maintain the earning capacity.
MATCHING CONCEPT	This expenditure is not matched with capital receipts.	This expenditure is matched with revenue receipts.

CONCLUSION

Capital and Revenue expenditure both are important for the business for earning a profit in the present as well as in subsequent years. Both have their own benefits and drawbacks. In case of capital expenditure an asset has been purchased by the company which generate revenue for upcoming years. On the other hand, no asset is required as such in the case of revenue expenditure.