Question

Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure: (a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable. (b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order. (c) Registration fees paid at the time of purchase of a building (d) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years. (e) Depreciation charged on a plant. (f) The expenditure incurred in erecting a platform on which a machine will be fixed. (g) Advertising expenditure, the benefits of which will last for four years.

Answer 1

Capital Expenditure
Meaning:  It is incurred to increase the earning capacity of a business.
Purpose: It is incurred to acquire fixed assets to carry out operations.
Benefits:  The benefits of such expenditures can be availed for more than one year.
Nature: It is non-recurring by nature.
Shown: Capital expenditure is shown in the assets side of the Balance Sheet.  

Revenue Expenditure
Meaning: It is incurred to maintain the earning capacity of a business.
Purpose: It is incurred to conduct day to day activities.
Benefits:  The benefits of such expenditures can only be availed for one year.
Nature: It is generally recurring in nature.
Shown: Revenue expenditure is shown in the debit side of the trading and Profit and Loss Account.