Capital Expenditure
Very simple term, money spent on acquiring fixed assets is called capital expenditure. It’s not always easy to distinguish between capital and revenue expenditures. Therefore, each expenditure must be characterized by certain features to determine whether it is capital or revenue. In general, the purchase of a machine is a capital expenditure. We will see what kind of accounting activity is incurred by purchasing a machine-
a) Fixed property has been acquired.
b) Money will not be spent repeatedly to acquire this property.
c) A lot of fruit can be obtained from this property for many years
d) This asset will use is long-term; and
e) It has increased the profitability of the organization
Commonly, the acquisition cost, expansion cost and development costs of an asset are included in the value of that asset. So, we can say, capital expenditure refers to the expenditure by which a permanent property is purchased to make a long-term continuous profit, and also remember that the profitability of the business increases due to the capital expenditure. Example: Machinery, furniture etc. It is displayed on the Fixed-asset side of the Balance Sheet.
Capital Receipts and Income
All receipts which are permanent in nature and received in business for a long period of time are called capital receipts or gain. This kind of receipts/gain doesn’t happen often in business. For example, Equity received from the owner, loan received from any person or institution, money received from fixed asset sale.
Income earned by means other than through the normal operations of the business (mainly from assets or a fixed nature) is called capital income. This is also not achieved repeatedly. For example, sale of fixed assets at a price higher than book value, sale of shares at bulk quantity, etc.
Revenue Expenditure
Such expenditure is opposite in nature to capital expenditure. Revenue expenditure is the money spent on running the day-to-day operations of the business. Its results are short lived i.e. within one accounting year. For example, employee salary, travel expenses, transportation expenses, wages, purchase of goods etc. This expense is repeatedly incurred in an accounting year. Elaborately, the expenses which are incurred repeatedly in carrying out the day-to-day operations of the business and the results of which are occurred in a short period of time i.e. within an accounting year are called revenue expenditure. This type of expenditure is shown in Income Statement/Statement of Profit or Loss. If this expense is outstanding then it is shown on the balance sheet’s liability side. It should be noted that, the expenditure incurred on the maintenance of fixed assets is also a revenue expenditure. For example, equipment repair cost, depreciation etc.
Revenue Receipts and Income
Revenue type of receipts and income refers to money that is repeatedly received or earned through the normal day-to-day operations of a business. But receipt and income are not the same thing. All income is receipt but not all receipts are income. For example, received money from sale of goods, commissions received, interest on loans given, rents received etc. are profit-related receipts but commissions received, interest and rents are revenue-related income.
How to Determine Capital and Revenue Expenditure?
Capital and revenue expenditure can be easily determined if the following features are observed:
a) Purpose of Expenditure: Expenditure incurred for the purpose of carrying on the day-to-day operations of the business is called revenue expenditure and expenditure incurred for the purpose of expansion and development of the business is called capital expenditure.
b) Nature of Expenditure: If the expenditure is permanent in nature and one time then it is called capital expenditure and if the expenditure is temporary and recurring then it is called revenue expenditure.
c) Nature of Utility: If the expenditure on a fixed asset increases the utility of that asset, it is called capital expenditure and if the expenditure results in maintaining the utility of the asset as before, then it is considered as revenue expenditure.
d) Period of Benefit: Expenditure is incurred in business with the expectation of benefit. Expenditure on which benefit is to end within a financial year is called Revenue Expenditure. And the expenditure which benefits can be enjoyed for several years is called capital expenditure.
f) Purpose of Assets Purchase: If a fixed asset is purchased for sale, then the expenditure incurred is called revenue expenditure and if any fixed asset is purchased for the long time use then it is revenue expenditure
g) Expenditure on Assets: Expenditure incurred for the purpose of acquisition, development, expansion, renewal, establishment, reinstallation etc. of any permanent nature asset is capital expenditure. And the recurring cost of keeping that asset in operation (eg, repair costs) is a revenue expenditure.
h) Depreciation of Assets: Depreciation of fixed assets is included in the revenue expenditure. Buying an old asset and spending more money on it to make it operational or increases its performance is capital expenditure.
Easy way to find the Capital and Revenue Receipts and Income
Certain principles and features are also to be observed for identifying capital and revenue type income.
a) Source of Receipts: If any receipt or income of the business is from fixed nature assets then it is called capital receipt or income. And if the source of receipt is temporary in nature, then that receipt will be called revenue receipt or income.
b) Tenure of Receipts: A receipt can be called a capital receipt if it is received or retained for a long period of time. And if the receipt is for a short period of time, then it will be treated as a revenue receipt or income.
c) Nature of Sale: If any income is derived from fixed property sale, then it is called capital income. And if any income or receipts are derived from current assets sales then it will be treated as revenue income.
d) Nature of Receipts: If receipts comes from any source on a recurring basis is called revenue receipts. And if the receipt is sudden or one-time then it will be treated as capital receipt.
More Resources