Treatment of Capital or Revenue Expenditure

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Concept of Capital Expenditure

A company incurs capital expenses when it acquires fixed assets. These can be furniture, building, plant machinery, vehicles, etc. Once these fixed assets are bought, these cannot be used for sales as these are bought for using by retaining them in the business. Such capital expenditure boosts the profit maximization of a trade. These expenses are incurred casually and do not have regularity in its payment.

If considered from the accounting point of view, capital expenditure has an important aspect of debiting its assets account for the assets bought, instead of the expenses account. However, if the expense account is debited, it is said to have an error which needs rectification at the earliest.

The accounting treatment of such capital expenditure can be illustrated as-

Building Account

A building account will be debited in various cases. These circumstances are-

  • When a building is purchased.
  • Purchasing raw materials required for the construction of a building.
  • Payment made in the process of purchasing building- registration fees or other expenses.
  • Expenses of wages for constructing this building.
  • Expenses of wages for some addition to the building.
  • Payment for extending the building which is constructed.
  • Fees of wages for erecting a canteen, shed or verandah in the building.
  • Repairing a second hand or old building.

In each of these cases mentioned above, instead of the building account, if the expenses account or wages account is debited, it will be termed as an error of principle. This will need further rectification.

Machinery Account

A machinery account gets debited in cases like-

  • Purchasing machinery for a company
  • Payment made for installing or erecting charges on the new machinery.
  • Payment of cartage and freight on any new plant machinery.
  • Repairing second hand machinery.

This is how assets accounts like vehicles account and furniture account are debited once they are bought or acquired. Expenses sustained as cartage, freight and other payments which form to be the cost of assets, get debited to their assets account. While purchasing any second-hand or old machinery, it is a must to undergo several repairs. These repairs help in keeping the assets in proper condition and add to its overall cost. Thus, these have a debit in the assets account.

The amount gained from the sale of assets is termed as capital receipts. However, if assets are sold, the assets account needs to be credited. But crediting the sales account for sale of assets will be wrong.

Treatment of Revenue Expenditure/ Income

Revenue expenditure is expenses which are incurred while fulfilling the day-to-day needs of a company. This can be payment of salaries, fees, insurance, rent, etc. It is even incurred while maintaining an asset. This maintenance can be renewals, repairs and maintenance of plant, building, machinery vehicles, plant, etc. Though these expenses are incurred all over the year, it has a unique feature of regularity in its payment.

Revenue expenses are not added to the profit maximization capability of a business. Instead, these are gained as a part of a company’s business activity. Revenue expenses account get debited once they are paid. For instance, instead of paying wages to workers, it is wrong to debit the worker’s account. It is wrong to debit the account of an employee who has been getting salaries.

Similarly, while paying the necessary rent to landlord, one needs to debit the rent account and not the account of Landlord. Thus, it needs to be remembered that whenever certain expenses are made, the respective expense account should be debited instead of the parties or people who have received the payment.

Regular receipt of income in the form of routine business receipt is considered to be revenue income. These are receiving interest, commission, discount rent, etc. In place of crediting the party or individual who is receiving the payment, the revenue account needs to be credited.

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