Principles for making distinction between
Capital Expenditure and Revenue Expenditure:
We have no hard and
fast rule for distinguishing capital expenditure
from revenue expenditure because, the same item of
expenditure may be treated as capital, revenue or
deferred revenue depending upon the circumstances.
For example, to a
machinery dealer purchase of machinery is a revenue
expenditure, while machinery purchased for
manufacturing goods is a capital expenditure. In the
same way, wages are generally a revenue expenditure,
but wages paid for the installation and erection of
a machinery is a capital expenditure. However,
generally the following principles are followed to
make a distinction between capital expenditure and
revenue expenditure.
| 1. |
Any
expenditure that benefits the business for
several accounting years, is regarded as a
capital expenditure; any expenditure that
benefits the business only for one
accounting year is considered a revenue
expenditure. |
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| 2. |
Any
expenditure which is not incurred repeatedly
and regularly (non-recurring) is a capital
expenditure, while any expenditure which is
incurred again and again (recurring ) is a
revenue expenditure e.g., motor car is not
bought again and again, but petrol required
to drive it is to be bought at regular
intervals. |
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| 3. |
Any
expenditure incurred to improve the concern
or to increase the profit-earning capacity
of the concern is a capital expenditure. On
the other hand, expenditure incurred to keep
the activities of a concern going, is
revenue expenditure. |
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| 4. |
Expenditure
incurred after buying second-hand asset to
bring it into proper working order is a
capital expenditure. |
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| 5. |
Expenditure
incurred on the purchase and installation of
a new asset is regarded as capital
expenditure. |
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| 6. |
6. Any
expenditure incurred on the extension or
addition to an existing asset is considered
as a capital expenditure. |
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