Capital and Revenue Expenditure: Rules to Determine Capital and Revenue Expenditure

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Capital and Revenue Expenditure
Capital and Revenue Expenditure
Capital and Revenue Expenditure: Rules to Determine Capital and Revenue Expenditure (Commerce)
  • Transaction: The exchange of money or money՚s Worth for goods and services.
  • Expenditure: money spent for the purpose of Running the business.
  • Capital: Those assets which are used for production of goods and rendering of services for further production of assets. Capital is something which renders benefit for the long term.
  • Revenue: The money earned from various sources of business.
Transaction: Exchange of Money
The Exchange of Money
The Exchange of Money
  • Capital Expenditure: Expenditure incurred to acquire an asset which would provide benefit to the firm of more accounting period. The expenditure incurred should be:

For the purchase or improvement of fixed asset

Asset should not be for resale

  • Revenue Expenditure: Outflow of funds to meet running expenses of the business is called Revenue expenditure.
  • Rules to determine capital and revenue expenditure
  • Capital expenditure:
Capital Expenditure

Revenue Expenditure

Revenue Expenditure

Need for Distinction between Capital and Revenue Expenditure

  • To find true profit or loss of the business.
  • Wrong categorization can lead to incorrect value for expenses, net profit and the value of the assets. For example if and expenditure on a building is incorrectly categorized as revenue rather than expense, the expenses would be overstated and the profit understated while the assets will also be understated.
  • For taxation benefit.

#UGC NET Commerce

#Accounting

#Capital Expenditure

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