Capital and revenu

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kishore (Querist)
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13 December 2013 what is basic difference between capital and revenue expenditure,deferred revenue exp. and how to audit for the same..fetching suitable example will be helpful.

CA Ghanshyam Joshi

CA Ghanshyam Joshi (Expert)
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13 December 2013 Capital expenditure is the outflow of funds to acquire an asset that will benefit the business for more
than one accounting period. A capital expenditure takes place when an asset or service is acquired or
improvement of a fixed asset is effected. These assets are expected to provide benefits to the business in
more than one accounting period and are not intended for resale in the ordinary course of business. In
short, it is an expenditure on assets which is not written off completely against income in the accounting
period in which it is acquired.
Some examples of capital expenditure:
(i) Purchase of land, building, machinery or furniture; (ii) Cost of leasehold land and building; (iii) Cost of
purchased goodwill; (iv) Preliminary expenditures; (v) Cost of additions or extensions to existing assets;
(vi) Cost of overhauling second-hand machines; (vii) Expenditure on putting an asset into working
condition; and (viii) Cost incurred for increasing the earning capacity of a business.

Revenue expenditure is the outflow of funds to meet the running expenses of a business and it will be
of benefit for the current period only. A revenue expenditure is incurred to carry on the normal course
of business or maintain the capital assets in a good condition.

Expenditures incurred for maintaining fixed assets in working order. For example, repairs, renewals and
depreciation.
Some examples of revenue expenditure
(i) Salaries and wages paid to the employees; (ii) Rent and rates for the factory or office premises;
(iii) Depreciation on plant and machinery; (iv) Consumable stores; (v) Inventory of raw materials,
work-in-progress and finished goods; (vi) Insurance premium; (vii) Taxes and legal expenses; and
(viii) Miscellaneous expenses.

CA Ghanshyam Joshi

CA Ghanshyam Joshi (Expert)
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13 December 2013 Deferred revenue expenditures represent certain types of assets whose usefulness does not expire in the
year of their occurrence but generally expires in the near future. These type of expenditures are carried
forward and are written off in future accounting periods. Sometimes, we make some revenue expenditure
but it eventually becomes a capital asset (generally of an intangible nature). If one undertake substantial
repairs to the existing building, the deterioration of the premises may be avoided. We may engage our
own employees to do that work and pay them at prevailing wage-rate, which is of a revenue nature. If
this expenditure is treated as a revenue expenditure and the current year’s-profit is charged with these
expenses, we are making the current year to absorb the entire expenses, though the benefit of which
will be enjoyed for a number of accounting years.

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