capital and-revenue-expenditure-ppt

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Presented by - R.M.I. Capital and Revenue Expenditure MMS A

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Page 1: Capital and-revenue-expenditure-ppt

Presented by -

R.M.I. Capital and Revenue Expenditure

MMS A

Page 2: Capital and-revenue-expenditure-ppt

Capital & Revenue Expenditure

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Expenditure The use of goods and services in order to

earn revenue is the expense. Hendriksen opines, "expenses are the

using or consuming of goods and services in the process of obtaining revenues".

"Expense is the expired cost, directly or indirectly related to given fiscal period, of the flow of goods or services into the market and of related operations."

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Expenditure Expenditure incurred during the fiscal period and

related to same accounting period becomes an expense i.e. expired cost of that period.

Expenditure incurred during the previous accounting period but related to current accounting period becomes an expense i.e. expired cost of the current accounting period e.g. prepaid expenses.

Expenditure related to the current accounting period but not paid becomes outstanding expenses.

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Expenditure Expenditure is usually of two

types:

(a) Capital expenditure; and

(b) Revenue expenditure.

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Capital and Revenue Expenditures

Increases operatin

g efficienc

y or adds to capacity

?

Capital Expenditure(Debit fixed asset

account)

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Capital and Revenue Expenditures

Increases operatin

g efficienc

y or adds to capacity

?

Increases useful life

(extraordinary

repairs)?

Capital Expenditure(Debit fixed asset

account)

Page 8: Capital and-revenue-expenditure-ppt

Revenue Expend

iture (Debit

expense

account for

ordinary

maintenance and

repairs)

Increases operatin

g efficienc

y or adds to capacity

?

Increases useful life

(extraordinary

repairs)?

Capital Expenditure(Debit fixed asset

account)

Capital and Revenue Expenditures

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ASSETS

Capital and Revenue Expenditures

CAPITAL EXPENDITUR

ES

1. Initial cost2. Additions3. Betterments4. Extraordinary repairs

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ASSETS

EXPENSES

Capital and Revenue Expenditures

CAPITAL EXPENDITUR

ES

Normal and ordinary repairs and maintenance

REVENUE EXPENDITUR

ES

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Key words indicating Capital expenditure

Key words indicating Revenue expenditure

EnhanceUpgradeExtendImprove

RepairMaintainReplaceLike-for-likeRemedialRenew

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Capital Expenditure Capital expenditure consists of expenditure, the

benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods.

It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset.

These are not meant for sale. Expenditure incurred for improving assets and

extending an existing asset is also capital expenditure.

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Capital Expenditure The sum of invoice price, freight and

insurance charges, installation and erection cost and custom duty etc. will be capitalized in the books of a firm.

These capital items appear on the assets side of Balance Sheet.

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Capital Expenditure Includes

Capital Expenditure may include the following:

Purchase costs (less any discount received) Delivery costs Legal charges Installation costs Up gradation costs Replacement costs

As capital expenditure results in increase in the fixed asset of the entity, the accounting entry is as follows: -

Debit Fixed Assets

Credit Cash/Payable

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Capital Expenditure - Examples

Interest on capital paid during the period of construction of Company (u/s 208 of Indian Companies Act)

Expenditure in connection with or incidental to the purchase or installation of an asset.

Acquisition of new assets. Expenditure incurred for putting the old asset

purchased, into working condition. Additions and extensions to existing assets. Interest and financing charges paid, brokerage and

commission paid. Betterment of fixed assets or improvement of an asset

to produce more, to improve its earning capacity or to reduce its operating expenses or to increase the life of asset.

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Capital Expenditure - Examples

The cost of assets will be written off by way of depreciation over a period of its life.

The amount of depreciation is a revenue expenditure and is debited to profit and loss account.

The reason for charging depreciation to revenue i.e. profit and loss account is that the asset is used for earning revenue.

Hence the depreciation is charged to profit and loss account.

Thus, the benefit of capital expenditure does not exhaust in one year but extends over a number of years of its use or life of the asset.

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Capital Expenditures Examples

Cost of goodwill. Cost of freehold land and building and the legal charges incurred in this

connection. Cost of lease. Cost of machineries, plants, tools, fixtures, etc. Cost of trade marks, patents, copy rights, designs, etc. Cost of car, lorry etc. Cost of installation of lights and fans. Cost of any other assets acquired by way of equipment. Erection cost of plant and machinery. Cost of addition to existing assets. Structural improvements and alteration in the existing assets. Expenses for developments in case of mines and plantations. Expenses for administration incurred during construction and equipment

of any industrial enterprise. Expenses incurred in experimenting which finally result in the acquisition

of a patent or other rights.

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Revenue Expenditure Revenue expenditure consists of expenditure incurred

in one period of the accounting, the full benefit of which is enjoyed in that period only.

This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning capacity of the business.

It includes all expenses which arise in normal course of business.

The benefit of such expenditure is for a short period, say, one year only and it is not to be carried forward to the next year.

The expenditure is of a recurring nature i.e. incurred every year.

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Revenue Expenditure Include

Revenue costs therefore comprise of the following:

Repair costs Maintenance charges Repainting costs Renewal expenses The accounting entry to record revenue

expenditure is therefore as follows: -

Debit Revenue Expense (Income Statement)

Credit Cash/payable

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Revenue Expenditure Examples

Wages or salaries paid to factory workers. Machine Oil to lubricate. Electricity or Power required to run machinery or motor. Expenditure incurred in the ordinary conduct and administration of

business, i.e. rent, , carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.

Repair and maintenance expenses incurred on fixed assets. Cost of saleable goods. Depreciation of fixed assets used in the business. Interest on borrowed money. Freight, cartage, octroi duty, transportation, insurance paid on

saleable goods. Petrol or diesel consumed in motor vehicles. Service charges to motor vehicles. Bad debts. 

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Revenue Expenditure - Examples

Purchase of raw materials for conversion into finished goods.

Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, et(%

Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment.

Depreciation of plant, machinery and equipment. Expenses incurred in order to maintain the existing

fixed assets in an efficient and workable state such' as repairs to building, repairs to plant, white-washing and painting of building.

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Revenue Expenditure All these items appear on the debit

side of trading and profit and loss account, in case of trading concerns or income and expenditure account, in case of non-trading concerns.

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Revenue v/s Capital expenditure

• Its effect is temporary, i.e. the benefit is received within the accounting year.

• Neither an asset is acquired nor the value of an asset is increased.

• It has no physical existence because it is incurred on items which are used by the business.

• It is recurring and regular and it occurs repeatedly.

• This expenditure helps to maintain the business.

• Its effect is long-term, i.e. it is not exhausted within the current accounting year-its benefit is received for a number of years in future.

• An asset is acquired or the value of an existing asset is increased.

• Generally it has physical existence except intangible assets.

• It does not occur again and again. It is nonrecurring and irregular.

• This expenditure improves the position of the business.

Revenue Expenditure Capital Expenditure

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Deferred Revenue expenditure means essentially a revenue expenditure but the benefit of which is received over a period of more than one year.

Examples :

1.Heavy research expenditure2. Heavy advertisement expenditure

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Deferred Revenue Expenditure Deferred Revenue Expenditure is a revenue

expenditure which has been incurred during one accounting year which is applicable either wholly or in part to further accounting years.

According to Prof. A.W. Johnson, "Deferred Revenue Expenditure includes those non-

recurring expenses, which are expected to be of financial nature, distributed to several accounting periods of indeterminate total length. These are of revenue nature but are deferred or postponed. It is of quasi- capital nature."

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Deferred Revenue Expenditure Deferred Revenue Expenses are

those expenses, the benefit of which may be extended to a number of years, say, 3 to 5 years. These are to be charged to profit and loss account, over a period of 3 to 5 years depending upon the benefit accrued.

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Deferred Revenue Expenditure

Sometimes losses may be suffered of an exceptional nature e.g. loss of an asset (uninsured) due to

accident or fire; confiscation of property in a foreign country etc.

The amount which has not been debited to the profit and loss account of the current year is shown in the balance sheet on the assets side and it is known as fictitious asset.

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Purpose of Distinction Profit and Loss Account is debited with revenue

expenditure and credited with revenue income (i.e. sales income and from other sources).

If the revenue income is higher than revenue expenditure, it will be a profit and if it is less than revenue expenditure, it will be a loss.

Capital expenditure is shown on the assets side of Balance Sheet. Capital and liabilities are shown on the liabilities side of Balance Sheet.

The purpose of distinction is to give "True and fair" view of the accounts and financial position of the firm.

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Capital expenditure is treated as revenue

expenditure Value of fixed asset is understated Net profit is understated

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Revenue expenditure is treated as capital

expenditure Value off Fixed asset is overstated Net profit is overstated

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THANK YOU