Capital and Revenue Expenditure: Rules to Determine Capital and Revenue Expenditure
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- Transaction: The exchange of money or moneyีs 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.
- 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:
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
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#Capital Expenditure
โ Manishika