Competitive Exams Accountancy: Capital and revenue expenditure

What are basic rules for making difference between capital and revenue expenditure

  • Ist Rule: All expenses which are done for getting any fixed asset must be capital expenditure. For example, expenses of carriage and freight for getting fixed assets are also capital expenditure and will include in the total cost of fixed assets.
  • 2nd Rule: All expenses which are done for increasing the size or improvement in fixed assets must be capital expenditure.
  • 3rd Rule: All expenses which are done for getting share capital or long term loan must be capital expenditure.
  • 4th Rule: Look also nature of business, if business is relating to general goods sale-purchase transaction then above three rules will applicable but, if nature of business shows dealing in above transaction, then above transaction becomes revenue expenditure.
  • 5th Rule: Legal judgments is also so important for taking decision, Like Income tax law 1961 has provided some rule regarding assessment of business and profession. These rules also give good guidance for making difference between revenue and capital expenditures.