Capital And Revenue Expenditure | JAIIB 2021 Accounting & Finance For Bankers
Expenditure means spending on something.
Two types of expenditures are present ie Capital and Revenue expenditures depending upon many factors like
i) Nature of the expense
ii) Effects on revenue earning capacity
Iii) Benefit from expenditure
This is one of the common way to decide whether an expense incurred is capital or revenue. Certain expenses are recurring. Recurring refers to frequency with which a transaction occurs in a business.
A recurring expenditure is one which occurs frequently, for example, purchase of raw materials, payment of salary, rent, telephone charges, etc. These are revenue expenses.
A non-recurring expenditure is always capital in nature, unless materiality concept emphasises the importance of recognising it as revenue expenditure. Purchase of motor car, plant and building are some of the examples of capital expenditure.
The expenses which help to generate income/revenue in the current year are revenue in nature and should be matched against the revenue earned in the current period.
If the benefit from an expenditure incurred is of short duration, it is considered as revenue expenditure. As against this, if benefit is of long duration, it is treated as a capital expenditure.
The main purpose of incurring such expenditure is to earn income over a period of years, or increase the earning capacity of the business.
On the other hand, if expenditure helps to generate revenue over more than one accounting period, it is, generally, called 'Capital Expenditure, e.g. purchase of plant & machinery
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