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

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Image of Capital and Revenue Expenditure

Image of Capital and revenue Expenditure

Image of Capital and revenue Expenditure

Image of Capital and Revenue Expenditure

Image of 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

Transaction: Exchange of Money

Transaction: Exchange of money

Image of The exchange of money

Image of the Exchange of Money

Image of The exchange of money

Image of The exchange of money

Image of the Exchange of Money

Image of 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:

Image of ϖ Capital expenditure

Image of Π Capital Expenditure

Image of ϖ Capital expenditure

Revenue Expenditure

Image of Revenue Expenditure

Image of Revenue Expenditure

Image of 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.

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