Distinction between capital and Revenue expenditure

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Capital Expenditure:-

1) It results in acquisition of fixed assets which are meant for use and not for resale. 

  The Assets acquired are used for earning profit as long as they can serve the purpose of the business and sold only when they become unfit or obsolete for business.


2) it results in improving the earning capacity of the fixed assets,e.g., over - hauling the machinery for improving the business by increasing the earning capacity of the machinery.


3) It represents unexpired cost i.e., cost of benefit to be taken in future.


4) it is a non - recurring expenditure.


5) The benefit of such Expenditure will be for more than one year.

  Only a portion of such Expenditure know as depreciation is charged to profit and loss Account and balance amount of such Expenditure unless it is written off is shown in the Balance Sheet as an asset.


6) All items of capital expenditure which are not written off are shown in the Balance Sheet as Assets and are carried forward to the next year.


Revenue Expenditure:-

1) It does not result in acquisition of any fixed asset. This Expenditure is incurred for meeting the day - to - day expenses of carrying on operations of business.


2) It results in maintenance of business assets such as repairs and maintenance of machinery the existing capacity of the asset.


3) It represents expired cost i.e , benefit of cost has been taken.


4) It is a recurring expenditure.


5) The benefit of such Expenditure expires during the year and the amount is charged to Revenue Account, i.e Trading and profit and loss Account of the same year.


6) All items of revenue Expenditure the benefit which has exhausted during the year are transferred to Trading and profit and loss Account and the accounts representing such items are closed by transferring them to Trading and profit and loss.

  Such items are not  carried forward to the next year because their benefit has been taken during the year.

 Only a portion of the deferred revenue Expenditure, i.e heavy advertisement the benefit of which has not expired during the year is carried forward to the next year.

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