What Are The Principles For Making Distinction Between Capital Expenditures And Revenue Expenditures?


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Sajid Majeed answered
We have no hard and fast rule for distinguishing capital expenditure from revenue expenditure because, the same item of expenditure may be treated as capital, revenue or deferred revenue depending upon the circumstances e.g., to a machinery dealer purchase of machinery is a revenue expenditure, while machinery purchased for manufacturing goods is a capital expenditure. In the same way, wage is generally revenue expenditure, but wage paid for the installation and erection of machinery is a capital expenditure. Following principles are followed to make a distinguish between capital expenditure and revenue expenditure.

Any expenditure that benefits the business for several accounting years is regarded as a capital expenditure; while any expenditure which is incurred again and again is revenue expenditure.Any expenditure which is not incurred repeatedly and regularly is a capital expenditure, while any expenditure which is incurred again and again is revenue expenditure.

Any expenditure incurred to improve the concern or increases the profit-earning capacity of the concern is a capital expenditure. On the other hand, expenditure incurred to keep the activities of a concern going, is revenue expenditure.Expenditure incurred after buying second-hand asset to bring into proper working order is a capital expenditure.
Expenditure incurred on the purchase and installation of a new asset is regarded as capital expenditure.

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