business

CAPITAL EXPENSES VS. REVENUE EXPENSES

CAPITAL EXPENDITURE

REVENUE EXPENDITURE

1. Nature of Assets purchased

Any expenditure incurred to acquire a fixed asset or in connection with installation (expenses for installation) of fixed asset is capital expenditure.

Any expenditure incurred as price of goods purchased for resale along with other necessary expenses incurred in connection with such purchase are revenue expenses.

2. Discharging Liability

A payment made by a person to discharge a capital  liability is a capital expenditure

An expenditure incurred to discharge a revenue liability is revenue expenditure

3. Based on Transactions

If expenditure is incurred to acquire a source of income, it is capital expenditure e.g., purchase of patents to produce picture tubes of TV set.

An expenditure incurred to earn an income is revenue expenditure. E.g.  salary, advertisement etc.

4. Purpose of Transactions

If the amount is spent on increasing the earning capacity of an asset it is capital expenditure

Any expenditure incurred on keeping an asset in running condition is revenue expenditure

5. Nature of Payments in the hands of payer

If the expenses is incurred for acquiring capital asset from revenue receipts is also treated as capital expenditure

If the nature of payment in the hands of payer is of revenue nature, it will be revenue expenditure.

CAPITAL EXPENDITURE

  1. Cost of reconstructing, refurnishing, etc. of a business building.
  2. Payment made with a view to keeping his competitor out of his field of business
  3. Expenditure incurred in converting business premises when switching over from manufacture of one product to another.
  4. Expenditure on litigation in connection with acquiring or curing defective assets of the business.
  5. Compensation paid for cancellation of contract for the purchase of machinery.
  6. Price paid for the purchase of partner’s share in the firm.
  7. Expenditure incurred on the maintenance of business reputation

REVENUE EXPENDITURE

  1. Payment made for use of quota rights, or for use of patents and trade marks.
  2. Payment made for technical assistance.
  3. Expenditure incurred to send employees abroad for practical training    
  4. Repairs and maintenance incurred for machinery
  5. Discharging compensation package to the employees
  6. Expenditure incurred in raising loans, e.g., stamp duty, registration and legal fees, brokerage etc.
  7. Any such expenditure incurred wholly, totally, necessarily for the business.