It is not easy to decide whether a particular expenditure is of capital nature or that of revenue. Some expenses may lie on borderline and difficulty arises in deciding whether these are capital or revenue. This difficulty can easily be removed by answering the following questions:-
- Does the expenditure incurred in acquiring a fixed asset?
- Does the expenditure incurred for the improvement, addition, installation or erection of the fixed assets?
- Does the expenditure incurred in increasing the earning capacity of the business?
- Has it been incurred for raising capital monies for the business?
If the answer to any of the above-mentioned questions in the affirmative, the expenditure is capital, but if the answer is in the negative the expenditure is revenue:
Difference between capital and revenue expenditures
It is always possible to distinguish between capital and revenue expenditure easily due to the following reasons:-
- Certain expenses are in the nature of capital for some business and of revenue for others. for instance, in an engineering firm, some plant and machinery may have been purchased to earn profit and other may have been purchased for use in the .business, again in case of real estate business, land and building purchased are revenue expenditure as they may be purchased for resäle.
- Certain expenses may be said to be partly capital and partly revenue expenditure as for example, the combined cost of repairs, alterations and extensions of a fixed asset.
if there is a doübt as to the nature of any item, students should make a note at the foot of their solution as to the method of treatment adopted.