Capital Expenditure

Capital and Revenue Items:

Learning Objectives:

1. Define explain and give examples capital and revenue expenditures, receipts, payments, profits and losses.
2. What is the difference between capital and revenue expenditures?
3. What are the exceptions to the general rule of capital and revenue expenditures?

Difference between capital and revenue expenditures affects the fundamental principle of correct accounting. Proper adjustments are necessary before preparation of the final accounts. All items of capital and expenditure will find place in the balance sheet whereas all items of revenue expenditure will be included in the profit and loss account. If any incorrect adjustment or allocation is made between these expenditures, this will falsify the final results as disclosed by the revenue account or the balance sheet

Capital Expenditures:

Learning Objectives:

1. Define and explain capital expenditures

Expenditure means the amount spent. Any expenditure incurred for the following purposes is capital expenditure:

1. For acquiring fixed assets such as land, building, plant and machinery, furniture and fitting and motor vehicles. These assets should not be acquired with a view to resell them at a profit but to retain in the business. The cost of fixed asset would include all expenditure up to the asset becomes ready for use.
2. For making improvement and extensions to the fixed asset e.g., additions to buildings.
3. For increasing the earning capacity of a business or for reducing the cost of manufacture, administration or distribution in a business e.g., expenditure incurred in removing the business to a central locality or compensation paid to retrenched employee.
4. For raising capital monies for the business such as brokerage paid for arranging loans, discount on issue of shares and debentures, underwriting commission etc.

All capital expenditures represent either an asset or liability and are shown in the balance sheet.

List of Capital Expenditures - (Examples of Capital Expenditures):

The following is a list of the usual items of capital expenditures:

• Cost of goodwill.
• Cost of freehold land and building and the legal charges incurred in this connection.
• Cost of lease.
• Cost of machineries, plants, tools, fixtures, etc.
• Cost of trade marks, patents, copy rights, designs, etc.
• Cost of car, lorry etc.
• Cost of installation of lights and fans.
• Cost of any other assets acquired by way of equipment.
• Erection cost of plant and machinery.
• Cost of addition to existing assets.
• Structural improvements and alteration in the existing assets.
• Expenses for developments in case of mines and plantations.
• Expenses for administration incurred during construction and equipment of any industrial enterprise.
• Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights.