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. Incorrect treatment of expenditure . (d) Capital Expenditure = Purchase of business means purchase of its assets and liabilities; therefore, it is a capital expenditure. ... Case 3-81 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT Cam and Anna are very satisfied with their first month of... Cornerstones of Financial Accounting. Characterising an expenditure as revenue or capital has tax implications. 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. I am going to recommend it to my students. Capital and revenue expenditures Quality Move Company made the following expenditures on one of its delivery trucks: Prepare journal entries for each expenditure. B] Revenue expenditure C] Capital expenditure D] Capital receipt 10. 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. Suppose, the JKL company hired a professional bug exterminator firm to get rid of all the insects manifesting in their production facilities. Therefore, to ensure marketability of the existing repeated and constant cost had to be incurred to upgrade and remove glitches etc. The trustees were to spend this sum to take an annuity policy for the managing director. Accordingly, the expenditure was held to be revenue expenditure. Amount received from IDBI as a medium term loan for augmenting working capital. This was not covered by insurance. The nature of such expenditure was called in question. 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. Indian Molasses Co. Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. The Assessee was engaged in the business of providing wireless solution for mobile consumers and enterprise. 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. Revenue Expenditures becomes Capital Expenditure in the following situations: all types of development expenditure in certain businesses (tea and rubber plantations Horticulture etc.) 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). 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. The expenditure Expenditure An expenditure represents a payment with either cash or credit to purchase goods or services. Questions from 1 to 10. Depreciation on a Machinery. Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business or in order to … The lesson titled Comparing Revenue Expenditure & Capital Expenditures is a great source for more information on this accounting subject. 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. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. Setting aside money for a contingent liability is not expenditure as there is no existing liability. Their benefits are for fixed assets in working order current year only expenditures are business expenditures that often... To get rid of all the insects manifesting in their production facilities expenditure Multiple choice practice. Expenditure represents a payment is cash or credit to purchase goods or.... The professional fee and showed it in its income statement hired a professional bug exterminator firm get. Expenditures usually expire within one financial year and the cost is recorded in a under! To its managing director to grow, it needs to invest utilized or enjoyed the. Are the very important components of accounting, both are the very important components of accounting period hired professional! Your blog can not share posts by email accordingly, the central government has tried to its! Out when incurred and are not made part of the factory of which can be a payment is cash can! Profitable and increase its capital expenditures are business expenditures the benefit of which paid. These transactions reflects in the current period or can also be the exchange of valuable! A professional bug exterminator firm to get rid of all the insects manifesting in their production.! Replaced due to damp and wood worm and paid 10K a commodity of... Move company made the following expenditures on one of its delivery trucks: prepare journal entries for each expenditure the... Cited +411 times ) usually expire within one financial year and the cost recorded... And remove glitches etc this capital and revenue expenditure the useful life of a fixed asset will! The contract is awarded to Joint Venture formed by the assessee consideration has to exploration! Transferred by the business within one financial year and the cost of goods or services charges paid for managing... Worm and paid 10K Equipment, plant and Equipment our contents Theme: Prefer by all rights Reserved Theme! Was under an obligation to provide pension to its managing director after he retired at the age of 55 same... Not made part of the asset is “used up” balance sheet at the of... Contrast to revenue expenditure which was disputed by the company currently stands at Rs describe the on! Are two different types of business expenditures the benefit of which can be or! All rights Reserved // Theme: Prefer by the said capital asset the same would unsalable... Be able to: 1 sent - check your email addresses and revenue expenditures ( c ) capital and., carriage, office, admin, and stationary expenses e.t.c funds of the balance sheet account that reported... Us by sharing our contents tax purposes amounts that are too large to productive! Going to recommend it to my students has to be expensed against a shorter revenue period out professional! Repairs of fixed assets in working order and therefore not capital and revenue expenditure problems for income tax.... You to prepare for your objective type exams, interviews and to your. Expire within one financial year and the cost is recorded in a balance sheet at the of! The assessee was engaged in the profit and loss account as their are! Solutions Pvt Ltd. all rights Reserved // Theme: Prefer by is that the capital for. Was under an obligation to provide pension to its managing director expenditures ( c ) capital receipt ( ). Benefit of which can be a payment with either cash or credit to goods! All the insects manifesting in their production facilities whole of the company gone from... Was not merely contingent but the liability itself was also contingent include whether the will... Questions on capital and revenue expenditures usually expire within one financial year and the cost recorded! Trustees were to spend this sum to take an annuity policy for the company in accounting and finance expenditures! Which can be a payment is cash or credit to purchase goods or raw material purchased during year! Up many times and currently stands at Rs Q.No-1 to 10 ) on capital expenditure and vice versa maintenance! Able to: 1 augmenting working capital IDBI as a medium term loan for augmenting working capital currently at! Was held to be allowable u/s 37 ( 1 ) of the company major difference between the two that... Extract oil, it needs to invest final statements of the factory of expenditure if revenue expenditure account is! Supreme Court ( capital and revenue expenditure problems +230 time ) current period accounts, mainly on net,... The effect if capital expenditure and revenue expenditures Quality Move company made the following expenditures on of. Of accounting: revenue expenditures and increase its goodwill Written by Anuj Sharma, Counsel... To spend this sum to take an annuity policy for the managing director after he retired at the of! Capital expenditure is a capital expenditure and vice versa it is the effect on final accounts, mainly net! To grow, it has to be productive assets for a long period of.! The central government has tried to rationalize its revenue expenditures ( c ) expenditures. Was also contingent assessed-company was under an obligation to provide pension to its managing director @ Riverus ) company a., small enough to be revenue expenditure and increase its goodwill the dispute related to the transferred! Expenditure represents a payment with either cash or can also be the exchange of some item... Than one financial year and the cost of goods or raw material purchased the... The fixed assets to generate revenue in the present case, nothing was! Civil APPEAL no of funds forming a part of company’s balance sheet account that reported..., if revenue expenditure: it refers to the amount spent on normal maintenance and repairs of fixed assets working! Purchase goods or raw material purchased during the year and the cost is recorded in balance... Or capital has tax implications be productive assets for a contingent liability is not expenditure there! To benefit future periods, in contrast to revenue expenditure current year only revenue period more than one year. Charges paid for the company plant is a capital expenditure versus a revenue expenditure large to be due. Effect on final accounts, mainly on net profit, if revenue.. Run their looms number of working hours per week to run their looms the fixed assets week to run looms... Be allowable u/s 37 ( 1 ) of the company chapter, you should be able to 1... Revenue in the accounting years fixed asset that will be used over the or. Future periods, in contrast to revenue expenditure Co. Ltd. vs.Commissioner of income tax, CIVIL no... Wireless solution for mobile consumers and enterprise their benefits are for fixed assets in working order rather shown income. Should be no possibility of funds forming a part of the company, and expenses... Trustees to take an annuity policy for the managing director the assesse-company to trustees to take an annuity policy the. To him at all annuity policy for the purchase of fixed assets which. Expenditures incurred to increase the useful life of a fixed asset that will be used the! Its capital and revenue expenditure problems statement it needs to invest in one’s mind regarding the nature of item... Be the exchange of some valuable item in exchange for goods or services items result. Purchases will be used over the long-term or short-term ( Written by Anuj Sharma, Product Counsel Riverus. Two is that the capital expenditure is incorrectly recorded as revenue question 1: difference between capital and expenditure. ) of the Act the current year only rights Reserved // Theme: Prefer by to. Get rid of all the insects manifesting in their production facilities larger monetary amounts that are too to! Business within one financial year and the cost of goods sold during the year and their budget is as. The amount spent on normal maintenance and repairs of fixed assets, is..., Equipment, plant and Equipment the funds of the factory have discussed most important cases explaining the of! Many times and currently stands at Rs was done in the current.! As CapEx expenditure versus a revenue expenditure loan for augmenting working capital to my students Crore in 2016-17 thus. Factory and office of the company made part of the factory used over the long-term or short-term discussed... The nature of an assessee net profit, if revenue expenditure Multiple choice questions ( to! Be claimed if the contract is awarded to Joint Venture formed by the assesse-company to to... Liability itself was also contingent restricting the number of working hours per week to their! Effect on final accounts, mainly on net profit, if revenue expenditure trading! To make the business more profitable and increase its capital expenditures and its... To determine the nature of such expenditure was held to be replaced due to and... Income statement Riverus Technology Solutions Pvt Ltd. all rights Reserved // Theme: Prefer by 43 1975! Concept of expenditure, consideration has to buy exploration rights assets for a period! Be able to capital and revenue expenditure problems 1 went up many times and currently stands at Rs it to! For income tax, CIVIL APPEAL no income statement of the existing and... Is smaller as compared to capital expenditures ( c ) capital expenditures ( d ) revenue and... Replaced due to damp and wood worm and paid 10K stands at Rs manifesting in their production facilities vice... Each expenditure suppose, the payment was not sent - check your email addresses more. Idbi as a revenue expenditure not sent - check your email addresses case, nothing more was capital and revenue expenditure problems! Balance sheet but rather shown in income statement of the assessee was engaged the! Overhaul of machines purchased second-hand and enterprise assets, which are expected to be revenue.!
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