What is capital expenditure, revenue expenditure and deferred revenue expenditure? Give characteristics of each. When are revenue expenses treated as capital expenses. ( December- 2023 )
1. Capital Expenditure
Meaning:
Capital expenditure is the money spent on acquiring, improving, or extending the life of fixed assets that give benefit for many years. It means which expense gives benefit long term is called Capital Expenditure.
Examples:
- Purchase of machinery, building, furniture
- Cost of installation of machinery
- Major repairs that increase life of an asset
Characteristics of Capital Expenditure:
- Provides benefits for more than one accounting year.
- Increases earning capacity or life of an asset.
- Incurred to acquire or improve fixed assets.
- Recorded in Balance Sheet (added to the asset value).
- Not charged fully to Profit & Loss A/c in the same year (depreciation charged every year).
2. Revenue Expenditure
Meaning:
Revenue expenditure is money spent for the day-to-day running of a business and benefits only the current accounting year.
Examples:
- Salary, rent, stationery
- Repairs and maintenance
- Electricity expenses
- Cost of goods sold
Characteristics of Revenue Expenditure:
- Benefits are short-term (within one year).
- Helps in maintenance of assets, not in creating or improving them.
- Charged fully to the Profit & Loss Account in the same year.
- Necessary for daily operations.
- Does not generate future economic benefits beyond the current year.
3. Deferred Revenue Expenditure
Meaning:
These are expenses that are revenue in nature but the benefit lasts for several years, so they are not charged completely in one year.
Earlier they were shown in the Balance Sheet, but now as per Accounting Standards most are written off within a short period. deferred revenue expenditure
Examples:
- Heavy advertisement expenditure for launching a product
- Major repairs for temporary benefit
- Discount on issue of shares/debentures (old concept) deferred revenue expenditure
Characteristics:
- Revenue nature but benefit spreads over multiple years. deferred revenue expenditure
- Partly charged to Profit & Loss A/c every year. deferred revenue expenditure
- Remaining balance shown as a fictitious asset (older practice).
- Helps in increasing sales or achieving long-term advantages. deferred revenue expenditure
4. When Are Revenue Expenses Treated as Capital Expenses?
Revenue expenses are treated as capital when:
(i) They are incurred to acquire a fixed asset
Example:
- Wages paid for installation of machinery
- Transport charges for new furniture
Though wages/transport are revenue normally, here they are added to asset cost → capital expenditure.
(ii) They increase the efficiency or life of an existing asset
Example:
- Major overhaul of a machine
- Spending on rebuilding a building
Since it improves the asset, it becomes capital.
(iii) They bring a new advantage or long-term benefit
Example:
- Special repairs that increase productivity
- Expenses that create new capacity
(iv) They are necessary to bring the new asset to working condition
Example:
- Trial run expenses
- Testing expenses
- Consultancy fees for asset purchase
These are added to the asset cost.
Conclusion
In conclusion, capital expenditure creates or improves long-term assets, revenue expenditure supports the day-to-day operations of the business, and deferred revenue expenditure gives benefits over several years though revenue in nature. When a revenue expense helps in acquiring or enhancing a fixed asset, or provides long-term benefit, it is treated as capital expenditure. Together, these expenditures help in correctly determining profit and presenting a true financial position of the business. deferred revenue expenditure
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