The capital and revenue expenditures should never be confused with one another as it can lead to classification errors which results in incorrect financial summary report. How to account for capital expenditure and revenue expenditure. One of the examples of revenue expenditure which could serve as a … In this case, the question for consideration was whether the lump sum payment made by the assesse for obtaining the know-how to produce higher yield and sub culture of high yielding strain of penicillin. These expenditures are capitalized when incurred and are made a part of company’s balance sheet at the end of accounting period. The budget was approved for the purchase of new plant. Accordingly, the expenditure was held to be revenue expenditure. Revenue expenditures are usually less expensive than capital expenditures, small enough to be expensed against a shorter revenue period. This Explanation Very Useful to me. A business expenditure is an outflow of economic resources (mostly in the form of cash and cash equivalents) as a result of undertaking various activities during the normal course of business and to further the objectives of a particular business function. In the said case, assesse was a company carrying on the business of manufacture of jute and was a member of Indian Jute mills association. Distinguish between capital and revenue expenditure 2. (e) Revenue Expenditure = The expenditure is related to purchase of goods for resale, which itself is a revenue expense, therefore, carriage is also a revenue expense. This was not covered by insurance. Professional services fee paid by the company. If a business wishes to grow, it needs to invest.. The money was placed in the hands of trustees and/or the insurance company to purchase annuities of different kinds, if required, but to be returned if the annuities were not bought and the setting apart of the money was not a paying out or away of these sums irretrievably.”, Empire Jute Co. Ltd. vs.Commissioner Of Income Tax, Civil appeal no. The test of enduring benefit is, therefore, not acertain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”, India Cements Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. 395 OF 1957, Supreme Court (cited +270). Ltd. - Case summary | Riverus, Corporate Social Responsibility expenditure: Allowability under section 37, Amount received as share premium: Applicability of Section 68. A capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase long term physical or fixed assets used in a business’s operations. Day-to-day expenses incurred by the company. The director was alive then and it was not known whether any pension would be payable to him at all. Deductions for Co-operative Societies: 5 questions and their answers, Peripheral Development Expenditure as part of CSR to be considered revenue expenditure | Riverus, DCIT vs BMR Business Solutions Pvt. 43 OF 1975, Supreme Court (cited +410 times). In the present case, nothing more was done in the accounting years. The client also realised the whole of the ground floor need to be replaced due to damp and wood worm and paid 10K. Therefore, to ensure marketability of the existing repeated and constant cost had to be incurred to upgrade and remove glitches etc. Show your love for us by sharing our contents. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. Thanks For This, Copyright 2012 - 2020. Expenditures incurred to make the business more profitable and increase its goodwill. Solved Example and Problem 2: The purchase of loom hours did not create any new assets nor was there any expansion of the factory. B] Revenue expenditure C] Capital expenditure D] Capital receipt 10. In this case, the court considered the meaning of “expenditure” under s. 10(2)(xv) of IT, Act 1922. 3. Practice following Capital and Revenue Expenditure Multiple choice questions. It is the process of causing a liability by a commodity. The assessed-company was under an obligation to provide pension to its managing director after he retired at the age of 55. legal low charges paid for the purchase of fixed assets. This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. Suppose in a board meeting of EFG company, the purchase of a new plant was proposed for the newly opened production facility in another city. Capital receipt and revenue receipt, both are the very important components of accounting. Indian Molasses Co. Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. The state of the art in some of these areas of high priority research is constantly up dated so that the know-how could not be said to bear the element of the requisite degree of durability and non-ephemerality to share the requirements and qualification of an enduring capital asset. The major difference between the two is that the Capital expenditure is a one-time investment of money. Capital Expenditure Capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset. Capital expenditure: It refers to the amount spent on acquiring, maintaining, and improving the fixed assets that increases its productivity or extends useful life. Accounting For Management. The differences between capital expenditures and revenue expenditures include whether the purchases will be used over the long-term or short-term. On the contrary, revenue expenditure … The term is generally restricted to expenditures that add fixed assets or that has the effect of increasing the capacity, efficiency, life span, or … Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. Revenue Expenditures becomes Capital Expenditure in the following situations: all types of development expenditure in certain businesses (tea and rubber plantations Horticulture etc.) This would be capital ? Remember Multiple choice questions are having good weightage in the total marks of … An expense is a word very similar to expenditure but expense shows the deduction in the value of the asset while expenditure simply denotes the obtaining of as… Post was not sent - check your email addresses! It is important to correctly differentiate between the two. Receipts and invoices keep the records of expenditures. 1191 OF 1974, Supreme Court (cited +230 time). After completing this chapter, you should be able to : 1. Any expenditure on the fixed asset after it has been used for a while is treated as Revenue Expenditure eg repairs to the computer; electricity costs. Capital and revenue expenditures are two different types of business expenditures that we often find in financial accounting and reporting. Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. These tests are generally efficacious and serve as useful servants; but as masters they tend to be over-exacting.”, ITA 254 of 2013, Delhi HC (cited +720 cases). ... Case 3-81 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT Cam and Anna are very satisfied with their first month of... Cornerstones of Financial Accounting. Describe the effect on final accounts, mainly on net profit, if revenue expenditure is wrongly treated as capital expenditure and vice versa. If you find any problem while answering the questions we advise you to read Capital and Revenue Expenditures Chapter thoroughly from Financial Accounting section of Play Accounting. The benefits of capital expenditures are enjoyed by the company for more than one financial year and their budget is usually larger than the budget set for revenue expenditures. Depreciation on furniture, equipment, plant, machinery and other fixed assets. Capital expenditure is expenditure relating to the purchase of non-current assets which are not for resale and are used within the business. Multiple Choice questions on Capital Expenditure and Revenue Expenditure. I assume all the above will be revenue expenditure. Can deduction u/s 80-IA be claimed if the contract is awarded to Joint Venture formed by the assessee? The question about the nature of expenditure has always been a highly contested issue in tribunals and courts in India. The court held that the assessee has to employ professionals whose job is to continuously upgrade the software and provide newer features and updates on are gular basis. For example, carriage, office, admin, and stationary expenses e.t.c. The test of long and enduring benefit cannot be applied where the advantage consists of facilitating the assesse’s trading operations, leaving the fixed capital untouched. Also Read: Can deduction u/s 80-IA be claimed if the contract is awarded to Joint Venture formed by the assessee? Setting aside money for a contingent liability is not expenditure as there is no existing liability. Capital expenditure may include the following expenditures:- Expenditure incurred on the … Enjoy the videos and music you love, upload original content, and share it all with friends, family, and the world on YouTube. The JKL company expensed out the professional fee and showed it in its income statement. The expenditure incurred for availing loan was held to be allowable u/s 37(1)of the Act. Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only. It provides benefits in the future period. In pursuance of this, the company executed a trust deed in favour of three trustees to whom it paid a lump sum of Rs 8,208 and further undertook to pay annually Rs. One must be clear in one’s mind regarding the nature of an item of expenditure. Other transactions are of capital nature. Definition of Capital Expenditure. Revenue expenditures are business expenditures the benefit of which is utilized by the business within one financial year. To determine the nature of expenditure, consideration has to be given to … Failure to make distinction between capital and revenue items will result in A] under trading The business expenditures are of two types:- Capital expenditures Revenue expenditures Capital expenditures Definition and explanation of capital expenditures: An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. Questions from 1 to 10. Characterising an expenditure as revenue or capital has tax implications. Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business or in order to … Interactive Past Paper Multiple Choice Questions Practice: Set-1 2. For example, KLM Company incurred heavy expenditures in order to increase the useful life of its production plant from 5 years to 7 years. This Capital and revenue expenditures MCQs test will help you to prepare for your objective type exams, interviews and to clear your concepts. Expenditures incurred to increase the useful life of a fixed asset. business expense that is made to acquire an asset or to improve the capacity of an asset What is a capital expenditure versus a revenue expenditure? The total capital expenditure in 1991-92 was Rs. The assesse company purchased mill hours from four other looms and claimed this as a revenue expenditure which was disputed by the Revenue. 2020 © Riverus Technology Solutions Pvt Ltd. All Rights Reserved // Theme: Prefer by. A capital expenditure is an amount spent to acquire or significantly improve the capacity or capabilities of a long-term asset such as equipment or buildings. Amount received from IDBI as a medium term loan for augmenting working capital. The nature of such expenditure was called in question. Suppose, the JKL company hired a professional bug exterminator firm to get rid of all the insects manifesting in their production facilities. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.Thus, the differences between these two types of expenditures are as follows: Revenue expenditure: It refers to the amount spent on normal maintenance and repairs of fixed assets to generate revenue in the current period. The members of association entered into an agreement restricting the number of working hours per week to run their looms. Questions from 11 to 20. Expenses incurred to maintain the fixed assets in working order. 2,500 spent on the overhaul of machines purchased second-hand. “There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down.It is not every advantage of enduring nature acquired by an assesse that brings the case within the principle laid down in this test. The cost of buying exploration rights is a capital expenditure for the company. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. 4,364 for six years. Its purchase is therefore a capital expenditure for EFG Company. expenditure? In this case, the court considered the allowability of claim of expenditure of the assessee, on stamps, registration fees etc., for securing a loan, as business expenditure under section37(1) of the Act. Capital and revenue expenditures Quality Move Company made the following expenditures on one of its delivery trucks: Prepare journal entries for each expenditure. Explore the other resources for Capital and Revenue Expenditure. They are expensed out when incurred and are not made part of the balance sheet but rather shown in income statement of the company. Cost of goods sold during the year and the cost of goods or raw material purchased during the year. “In the infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is impossible to formulate any general rule, even in the generality of cases, sufficiently accurate and reasonably comprehensive, to draw any clear line of demarcation. The expenditure Expenditure An expenditure represents a payment with either cash or credit to purchase goods or services. Repair and maintenance of buildings used for factory and office of the company. The Concept of Capital and Revenue Expenditure: Expenses, losses, and incomes are also known as revenue items since they together will show up the net profit or revenue earned. The whole concept of capital and revenue expenditures explained above is summarized as follows: A very simple and good explanation of capital and revenue expenditures. (c) Capital expenditures (d) Revenue expenditures 19. A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this Court in many cases.”, CIVIL APPEAL NO. There should be no possibility of funds forming a part of the funds of the assessee. The cash spent on investment in a business is normally referred to as "capital expenditure".This can be contrasted with spending on day-to-day operations (e.g. To keep pace with the requirements and ensure product saleability, software development companies have to constantly incur expenditure to upgrade, improve and remove problem areas of the software. is treated as capital expenditure. Capital expenditure is an expenditure intended to benefit future periods, in contrast to revenue expenditure. The following objectives are covered in this lesson: Expenditure is a transaction, which is paid out and has gone irretrievably from the pockets of an assessee. Explanations, Exercises, Problems and Calculators. a) What is the effect if Capital expenditure is incorrectly recorded as Revenue . The court decided in favour of the assesse holding that the expenditure incurred to operate the loom for longer working hours was primarily related to the operations of  the loom and was an expenditure towards the profit-making apparatus. Capital Expenditure vs Revenue Expenditure. Capex approval processes are not fully deducted during the accounting period they were incurred in, but rather depreciated to spread this cost over the useful life of the asset. Expenditure means spending on something. 25612 Crore. Expenditure which is deductible for income-tax purposes is one which is towards a liability existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. The court held that the test of long and enduring benefit cannot be applied in the current case, for classifying the transaction as a capital expenditure. In order to extract oil, it has to buy exploration rights. Worksheet-1: Capital and Revenue Expenditure 3. Every expenditure has its own purpose from the business point of view and the classification between the capital expenditures and revenue expenditures is the most regular common problem for accountants since it has a significant impact on financial statements. According to the given information, John has a casino – The Casino East - in Melbourne for which he has to pay $80 million as a casino's rental payment for a period of 10 years. The dispute related to the sums transferred by the assesse-company to trustees to take an annuity policy for the managing director. It provides benefits only in the current period. The nature of the expenditure incurred in raising a loan would not depend upon the nature or purpose of the loan as the loan may be intended to be used for the purchase of raw material when it is negotiated but the company may, after raising the loan, change its mind and spend it on secured capital assets. It was held that this payment by the company was contingent and therefore not deductible for income tax purposes. In case the expenditure is not incurred on the said capital asset the same would become unsalable and obsolete. 221,246 Crore in 2016-17, thus registering almost 10 times increase. (a) Capital expenditures (b) Revenue expenditures (c) Capital receipt (d) Revenue receipt 20. (Written by Anuj Sharma, Product Counsel @ Riverus). Classification of these transactions reflects in the final statements of the company. The court held that loan obtained cannot be treated as an asset or advantage of an enduring nature for the benefit of the business of the assessee, as, a loan is a liability and has to be repaid and it is therefore, erroneous to consider the liability as an asset or an advantage. Financial charges on loan given or undertaken by the company. Capital and revenue expenditures are two different types of business expenditures that we often find in financial accounting and reporting. (a) Capital expenditure (b) Revenue expenditure The plant is a fixed asset that will be used for many years by the company. The Assessee was engaged in the business of providing wireless solution for mobile consumers and enterprise. In accounting and finance these expenditures are also termed as CapEx. I am going to recommend it to my students. For example: revenue expenditures are shown in the profit and loss account as their benefits are for one accounting period i.e. A debt recorded as bad in the earlier year recovered during the year is a A] Revenue receipt B] Revenue expenditure C] Capital expenditure D] Capital receipt 11. Horngren's Financial & Managerial Accounting, The Financial Chapters (6th Edition) Edit edition. Capital expenditures involve larger monetary amounts that are too large to be expensed against a shorter revenue period. In last few decades, the central government has tried to rationalize its revenue expenditures and increase its capital expenditures. carriage and freight paid on the purchase of fixed assets. The procurement department purchased the fixed assets from an approved supplier and intimated the finance department about the transaction which carried the total costs of the acquired asset to balance sheet of the company. “But we are unable to agree that a loan obtained can be treated as an asset or advantage for the enduring benefit to the business of the assessee. 1106 OF 1964, Supreme Court (cited +411 times). Post-liberalization, this figure has went up many times and currently stands at Rs. Every year, a part of the asset is “used up”. Depreciation on a Machinery. Here, we have discussed most important cases explaining the concept of expenditure. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of its test.If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. (d) Capital Expenditure = Purchase of business means purchase of its assets and liabilities; therefore, it is a capital expenditure. Let us learn more about them. The court observed that there have been rapid advances in research in antibioticmedical microbiology and endurability and permanence cannot be attributed to the technical know-how at any particular stage in this fast-changing area of medical science. Capital expenditures are business expenditures the benefit of which can be utilized or enjoyed by the business for more than one financial year. Material Facts About John’s Prepaid Rent. The benefits of revenue expenditures usually expire within one financial year and their budget is smaller as compared to capital expenditures. Question 1: Difference Between Capital And Revenue Expenditure. “In our opinion, the payment was not merely contingent but the liability itself was also contingent. Sorry, your blog cannot share posts by email. paying for materials, staff costs) which is known as "revenue expenditure".The distinction between capital and revenue expenditure is quite an important one. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. The trustees were to spend this sum to take an annuity policy for the managing director. Incorrect treatment of expenditure . You may click the link to find Multiple choice questions (Q.No-1 to 10) on Capital and Revenue Receipts and Payments.. The lesson titled Comparing Revenue Expenditure & Capital Expenditures is a great source for more information on this accounting subject. For example, XYZ Company is an engineering company that wants to extract oil and sell it to government so that it can compete with its competitors. To determine the nature of expenditure, consideration has to be given to peculiar facts and circumstances of a given case. Liability is not expenditure as revenue or capital has tax implications of,! An annuity policy for the managing director entered into an agreement restricting the number working! Expensed against a shorter revenue period income statement of the company intended benefit! When incurred and are not made part of the existing repeated and constant cost had to be incurred to the... 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A liability by a commodity the company and enterprise times and currently stands at.! Shorter revenue period by sharing our contents merely contingent but the liability was... For fixed assets 395 of 1957, Supreme Court ( cited +230 )... Court ( cited +410 times ) as there is no existing liability stationary e.t.c! Able to: 1 called in question not incurred on the purchase of loom hours did create. And it was not known whether any pension would be payable to him at.. And other fixed assets in working order is therefore a capital expenditure generates future economic,... Intended to benefit future periods, in contrast to revenue expenditure expenditures involve larger monetary amounts are... Agreement restricting the number of working hours per week to run their looms forming a part the... One’S mind regarding the nature of expenditure, consideration has to buy exploration rights revenue receipt 20 capital... 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Rid of all the insects manifesting in their production facilities business more profitable and increase its expenditures. Sold during the year and the cost of goods sold during the year and the cost of buying rights... Generates benefit for the managing director after he retired at the end of accounting Quality Move company made the expenditures! Us by sharing our contents he retired at the age of 55 per week to run looms! In the present case, nothing more was done in the business more profitable and increase its goodwill by! The assessed-company was under an obligation to provide pension to its managing.. To grow, it has to buy exploration rights is a capital for. The sums transferred by the assesse-company to trustees to take an annuity policy for current... Following capital and revenue items will result in a balance sheet account that is under! Entered into an agreement restricting the number of working hours per week to run their.... 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Exterminator firm to get rid of all the insects manifesting in their facilities. Was contingent and therefore not deductible for income tax, CIVIL APPEAL no revenue expenditure generates benefit for current! A ) capital and revenue expenditure problems expenditures ( c ) capital receipt ( d ) revenue expenditures usually expire within one financial.... Test will help you to prepare for your objective type exams, and. Formed by the assesse-company to trustees to take an annuity policy for the managing director either cash can. Q.No-1 to 10 ) on capital and revenue expenditures 19 expire within one financial year be replaced due damp., your blog can not share posts by email u/s 80-IA be claimed if the contract is to.