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CAPITAL AND REVENUE
Capital and Revenue expenditure
Capital Expenditure means any expenditure incurred to :
2.
3.
Acquire an asset and bring it into working condition
Improve the efficiency or substantial working life of the asset
Improve the performance of the business
.
Eg. 1.Purchase of machinery
2. Fees paid for installation of machinery
3. Custom duty paid for import of machinery
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1.
Revenue Expenditure means any expenditure incurred to
maintain the assets in working condition and for the operation
of the business.
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Examples
1.
Repairs of furniture
2.
Painting of building
3.
Purchase of stationery
4.
Salaries
Deferred Revenue expenditure means essentially a revenue
expenditure but the benefit of which is received over a period of
more than one year.
1.Heavy research expenditure
2. Heavy advertisement expenditure
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Examples :
The most important factor affecting the classification is the nature of
business.
1. To adhere to Matching Principle
2. To enable a true and fair view of financial statements
3. To show correct financial results
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Need to classify expenses into capital and revenue
Class exercise 1
Classify the following expenditure into capital , revenue and
deferred revenue.
1.
2.
4.
5.
6.
7.
8.
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3.
Purchase of building
Legal fees paid for assessing title deeds for purchase of
building
Repair expenses incurred on an second hand machinery
purchased
Salaries paid to staff
Expenses incurred for advertising the company’s product in
local newspaper
Expenses incurred for shifting the raw materials from one
godown to another
Replacement of a worn out part of machinery with a new part
The coal fired engine broke down and it was replaced with a
gas fired one.
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9.
Freight paid on purchase of machinery
10. Installation and commisioning charges paid for erection of
machinery’
11. Built an extension to the factory building
12. Rebuilt a wall destroyed by storm
13. Repair expenses incurred on new machinery before installation.
14. Heavy expenditure on research for development of new product .
The research was successful
15 Heavy expenditure on research for development of new product .
The research was not successful
16. Heavy marketing expenditure incurred on launching a new
product.
17.Purchase of second hand furniture
18. Purchase of motor car
19. Purchase of petrol for the new motor car
20. Purchase of new tyres for an old motor car
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21. Interest paid on loan taken for the purchase of machinery. The
commercial production has not yet begun
22. Interest paid on loan taken for the purchase of machinery. The
commercial production has begun.
23. Heavy legal fees paid to lawyers for a suit filed against the
company. The case was successful.
24. Heavy legal fees paid to lawyers for a suit filed against the
company. The case was not successful.
25 Transport charges paid for purchase of furniture
26 Transport charges paid for purchase of goods
27 Temporary shed erected for storing materials for construction of
building
28. Payment made to security agencies for guarding the factory
building
29. Annual maintainance charges paid for computers
30. Payment made for purchase of raw materials.
FIXED ASSETS
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Accounting for fixed assets involves the following :
 At what cost should an asset be recorded in books ?
 How should use of assets be recorded?
 How should the sale, disposal, retirement of asset be
recorded ?
so that the assets in the Balance Sheet show a true and
fair view
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What are fixed assets ???
Categories of Fixed assets
1.Tangible assets – Property, plant & equipment
3.Natural resources – Oil & gas wells , mines , forests
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2.Intangible assets – Trade marks ,patents, copyrights,
goodwill
Cost of acquisition of assets
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Borrowing costs
Basket purchases

Donated assets

Self constructed assets
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
Accounting for



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
Natural resources.
Intangible assets
Research and development costs
Computer Software costs
Revaluation of fixed assets
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Revaluation reserve



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
Disposal of assets
Asset exchanged for other asset
Amortisation of intangible assets
Impairment of assets
Depreciation
Depreciation is based on 2 estimates :
life of the asset
 Expected salvage value of the asset
 Hence depreciation =
cost of the asset – salvage value
estmated useful life
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 Useful
Methods of depreciation
2.Written Down value method / reducing balance method
1- nth root of Residual value/ Cost
where n = useful life in years
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1.Straight line method / original cost method
Cost – residual value
Useful life
3. Production units method
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Unit depreciation rate = Cost
Expected output over the useful life
A coal mine is expected to produce 12,50,000 tons of coal over
its useful life. If the cost of acquisition of the mine
Rs.1000000 then the depn rate = 1000000/ 1250000 tons
= Rs.0.80/ton
This rate is applied on the actual tons extracted every year.
Class exercise 1
ABC Ltd. took up an project to expand its existing capacities. All the costs incurred were debited to Project
Account as under :
Rs.
1200000
50000
5000
2000000
30000
40000
1500000
100000
15000
25000
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1. Cost of land
2. Commission paid to estate agents
3. Cost of clearing and levelling the land
4. Cost of construction of building
5. Cost of fencing
6. Architects fees for building design
7. Purchase price of machinery
8. Installation charges for machinery
9. Cost of trial runs
10. Registration charges for title deed of land
11. Repair charges of building wall damaged during
installation of machinery
2. Compensation paid to worker injured during const.
8000
10000
The project was financed partly by borrowings of Rs.3000000 @ 12% interest. Interest paid was debited to
interest A/c. A supervisor was deputed for the project work. He spent 1 month for the selection and
preparation of land and 4 months for the construction of building and 2 months for machinery
installation. His annual salary of Rs.60000 is debited to Salary A/c
The project commenced on February’06 and plant was installed and commissioned in Dec’06.
Determine the costs at which land, building and machinery should be capitalised. Assume that the
borrowings were used equally for building and machinery.
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AB & Bros. purchased a automobile showroom for
Rs.5000000. The assets and their FMVs are as under :

Land
2000000

Building
3000000

Equipment
500000

Furniture
200000

Tools Accessories 500000
At what value should AB & Bros. capitalise its assets
At what value should the new motor car be
capitalised in the books
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A Ltd. exchanges a motor car for a new model
costing Rs 500000. The seller gives an allowance of
Rs. 100000 for the old car. The book value of the
motor car is 125000.