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Capital/Revenue

Shyam Lal Naik (Service) (6156 Points)

31 July 2007

Hi,

Whether 1st year premium on insurance of Plant & Machinery is capital or revenue expenditure?

1st year insurance premium is paid before the Plant is put to use. How ever it is a recurring and normal operating expenditure.

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3 Replies

shrabani dutta (CA final student) (110 Points)
Replied 31 July 2007

1st year insurance premium on plant & machinery is a capital expenditure and should be capitalised.

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Srivathsan Rangarajan (Chartered Accountant) (66 Points)
Replied 31 July 2007

I believe the treatment of first year premium depends on whether it is incurred as part of costs or as incidental expenses. For example when an asset is purchased and the payment to supplier includes insurance premium also then there is no question of charging the same to revenue whereas, the asset is purchased and put to use ans sbusequently insurance is taken then it has to go to the revenue only. Please note that any change in the cost of capital asset after the same is ready for use has to satisfy the conditions specified in this behalf. Thus once the asset is capitalised no payment will be generally capitalised. In the instant case the querist has to clearly understand whether it is paid before being ready for use or put to use. Capitalise only in the case of former.