Question

Which principle has important bearing on the capital-revenue classifications?

Answer 1

Revenue Expenditure and Capital Expenditure of India!

An expenditure that neither creates assets nor reduces a liability is categorised as revenue expenditure. If it creates an asset or reduces a liability, it is categorised as capital expenditure.

This is the basis of classification between revenue expenditure and capital expenditure.

(a) Revenue Expenditure:

ADVERTISEMENTS:

Simply put, an expenditure which neither creates assets nor reduces liability is called Revenue Expenditure, e.g., salaries of employees, interest payment on past debt, subsidies, pension, etc. These are financed out of revenue receipts. Broadly, any expenditure which does not lead to any creation of assets or reduction in liability is treated as revenue expenditure.

Generally, expenditure incurred on normal running of the government departments and maintenance of services is treated as revenue expenditure. Examples of revenue expenditure are salaries of government employees, interest payment on loans taken by the government, pensions, subsidies, grants, rural development, education and health services, etc.

It is a short period expenditure and recurring in nature which is incurred every year (as against capital expenditure which is long period expenditure and non­recurring in nature). The purpose of such expenditure is not to build up any capital asset, but to ensure normal functioning of government machinery. Traditionally, all grants given to state governments are treated as revenue expenditure even though some of the grants may before creation of assets.

(b) Capital Expenditure:

An expenditure which either creates an asset (e.g., school building) or reduces liability (e.g., repayment of loan) is called capital expenditure.

ADVERTISEMENTS:

(A) Capital expenditure which leads to creation of assets are (a) expenditure on purchase of land, buildings, machinery, (b) investment in shares, loans by Central government to state government, foreign governments and government companies, cash in hand and (c) acquisition of valuables. Such expenditures are incurred on long period development programmes, real capital assets and financial assets. This type of expenditure adds to the capital stock of the economy and raises its capacity to produce more in future.

(B) Repayment of loan is also capital expenditure because it reduces liability. These expenditures are met out of capital receipts of the government including capital transfers from rest of the world.

Comparison between Revenue Expenditure and Capital Expenditure

Revenue ExpenditureCapital Expenditure1. It is incurred for normal running of government departments and maintenance.1. It is incurred for acquisition of capital assets.2. It does not result in creation of assets.2. It results in creation of assets.3. It is recurring in nature and incurred regularly.2. It is non-recurring in nature.4. It is short period expenditure.4. It is generally a long period expenditure.5. For example, expenditure on medicines and salaries of doctors for rendering services is5. For example, construction of a hospital building is capital expenditure