Capital Expenditure and Revenue Expenditure

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    Capital expenditure

     

    is incurred when a business spends money either to

    • Buy fixed assets or
    • Add to value of an existing fixed asset

    Capital expenditure includes the cost of acquiring a fixed asset, bringing it into business, legal cost incurred on that asset, carriage inwards, any other cost needed to get a fixed asset ready for use.

    When an item of capital expenditure is sold, the money received is called capital receipt and is credited to the fixed asset account in the general ledger.

     

     

    Revenue expenditure

    is incurred when a business spends money on running the business on day to day basis.

    For example : to buy a vehicle is capital expense but paying for the fuel and maintenance is revenue expenditure.

    revenue receipts include sales and other revenue items. These are added to the gross profit.

    Similarly, painting a newly constructed building is capital expense, on the other hand, repainting the same building 5 years later is considered revenue expenditure.

     

    Differed Expenditure : an expenditure in which element of capital exp and revenue exp both are present simultaneously.

     

    If capital exp is treated as revenue esp and entered into the books

    Or

    Revenue exp is treated as capital exp and entered into the books then

    Both, the balance sheet and the trading profit and loss accounts figures will be incorrect.