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Capital expenditure or revenue expenditure

Ritesh Kumar Udaipuria (Article Assistant) (25 Points)

28 June 2014

HI, Whether Purchase of Ram, UPS is a capital expenditure or Revenue Expenditure?

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19 Replies

CA. Roopali Kadam (Jobs on assignment basis.) (1453 Points)
Replied 28 June 2014

If amount is immaterial. can show as Revenue expense

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sumit (Self Employed with GST Working) (57 Points)
Replied 28 June 2014

Ritesh,

Purchase a UPS is a CAPITAL Expenditure whereas purchase of RAM is a Revenue Expenditure and I have a question from Roopali, Please tell me what do you mean by "if amount is immaterial"

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CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 28 June 2014

sumit is right.................

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CA. Roopali Kadam (Jobs on assignment basis.) (1453 Points)
Replied 29 June 2014

Sumit Sir

Hope this answers your question & please explain how you have considered UPS as capital and RAM as revenue exp.

Guidance Note on Accounting for Depreciation in Companies

Depreciation on low value items

P26.

Prior to the enforcement of the Companies (Amendment) Act, 1988, many companies used to follow the practice of writing off low value items in the year of acquisition, since such a write off was permitted under the Income-tax Act.
The limit for such a write off was Rs. 5,000/-. Schedule XIV is, however, silent on this aspect.
The Committee is of the view that the concept of materiality should be kept in mind while deciding the amounts to be written off in this regard.
- For instance, in small companies, the total write off on this basis may be a substantial figure, it may not, therefore, be proper to charge 100% depreciation on low value items.
- However, in large companies, where the value of assets is very high, it may be proper to charge 100% depreciation on low value items keeping in view the concept of materiality.
The Committee recommends that the accounting policy followed by the company in this regard should be disclosed appropriately in the accounts.

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 29 June 2014

Rupali G The guidence notes given by Institute is mare indicative like recommendation its not mandatory to follow ..whereas it is a capital expenditure whether it shall be charged to revenue or to be capitalised its matter of decision depends upon company and their judgements... go by defination of capital expenditure might u will get clarified......

CA. Roopali Kadam (Jobs on assignment basis.) (1453 Points)
Replied 29 June 2014

https://icai.org/resource_file/13133Annexure-I_AASB_25092008.pdf

Ref. Para 5.Guidance Note are recommendatory in nature.A member should ordinarily follow recommendations in a guidance note, else disclosure may require

CA. Roopali Kadam (Jobs on assignment basis.) (1453 Points)
Replied 29 June 2014

As 10 Para 8.1 Identification of Fixed Assets.

"An enterprise may decide to expense an item which could otherwise have been included as fixed asset, because the amount of expenditure is not-material "

CA. Roopali Kadam (Jobs on assignment basis.) (1453 Points)
Replied 29 June 2014

& capital Expenditure is also defined in Guidance Note (Recommendatory in nature). Is it defined in any AS?

CA Saroj Kumar (Keen to learn something new every moments) (2588 Points)
Replied 30 June 2014

Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life extending beyond one year.

CA. Roopali Kadam (Jobs on assignment basis.) (1453 Points)
Replied 30 June 2014

Have you seen any Calculator A/c as Fixed Asset in any books?

jatin aswani (ARTICLE ASSISTANT) (102 Points)
Replied 30 June 2014

You should capitalised it....if they increase the performance of your asset beyond standard

1 Like

Aum Maheta (none yet) (216 Points)
Replied 30 June 2014

If Ram Purchased is of higher capacity as compared to previous one, Can't v classify it as capital exp., since such higher capacity ram will enhance processing speed... thereby increasing processing capacity ...and yaa wht rate of depn u will apply on ups, as in one case study i saw if ups is integral part of comp. system where computer operations couldn't be carried on without d use of ups then 60% rate will apply....else treated as machinery (15%)...

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Amit Jakhwal (Article Assistant) (49 Points)
Replied 30 June 2014

Ups and Ram is a revenue expenditure

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Sahil Bhatia (Practicing Chartered Accountant) (290 Points)
Replied 30 June 2014

Roopali's view is correct. But in most cases its treated as revenue exp. I dont understand that why would u capitalise it and claim 60% depreciation if 100% of expense is charged to p&l

1 Like