Page 41 - DMGT104_FINANCIAL_ACCOUNTING

Unit 2: Principles of Accounting

Capital Expenditure Notes

The expenditure incurred for acquiring a fixed asset or which results in increasing the earning
capacity of the business is known as Capital Expenditure.
The benefits of capital expenditures are generally availed in several accounting years. Following
are some of the examples of Capital Expenditure.
1. Expenditure incurred for the acquisition of a fixed asset

Example: Building, furniture, machinery, etc.
2. Expenditure incurred for the inward carriage or erection of a fixed asset

Example:
(a) Carriage paid in connection with the purchase of fixed asset;
(b) Wages paid to laborers’ in connection with the installation of machinery.
These expenses form part of the cost of the fixed asset.
3. Expenditure incurred for extension or improvement of an existing fixed asset

Example: Money spent in connection with increasing the seating capacity of a cinema
hall or constructing an additional room.
4. Expenditure incurred for the major repairs of an old asset

Example: Repairs for reconditioning machinery.
5. Expenditure incurred for the replacement of an old asset with a new asset.

Example: Replacing a hand-driven machine by automatic machine.
Revenue Expenditure

An expenditure incurred in the course of regular business a transaction of a concern is availed
during the same accounting year is known as Revenue Expenditure. Following are some of the
examples, of Revenue Expenditure.

1. Expenditure incurred on the purchase of raw materials.
2. Expenditure incurred in the day-do-day running of business.

Example: Wages, salaries, rent, rates and taxes, office expenses, interest, discount, etc.
3. Expenditure incurred for the upkeep of an asset

Example: Repairs, maintenance charges, etc.
4. Expenditure incurred for the purchase of goods meant for sale.

Example: Purchases, carriage inwards, import duty, octroi, etc.
5. Depreciation of fixed assets.

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