Points to be taken into consideration for the classification of expenditure as Capital or Revenue
1) Benefit derived: Normally, the benefit of capital expenditure is derived for a longer period of time i.e. exceeding a financial year or so as against Revenue Expenditure. For example: When you purchase a computer usually lasts for 4 to 5 years and hence is a capital expenditure by you.
2) Consideration: The amount incurred on a capital expenditure far exceeds that of revenue expenditure and is usually a big amount. For example: When you purchase a house, the amount paid to acquire it is greater than the amount you pay for buying food to eat.
3) Frequency of Payments: A capital expenditure is incurred once or in lump sum mostly as against revenue expenditure which is periodic in nature. For example, You frequently purchase fruits to eat hence it is a revenue expenditure but the land is purchased once in a while.
4) Source of making the payments: As a general rule, the capital expenditure is paid out of capital owing to its large amount, and the revenue expenditure is paid out of revenue receipts like sales, etc. However, it is not a mandatory rule.
State with the reasons whether the following items of expenditure are of capital or revenue nature.
i. Goodwill purchased for Rs 19,000.
ii. Repairs paid for machinery Rs 5,000
iii. Fees paid for obtaining a license to start a business.
iv. Duty paid for importing a new machine.
v. Agriculture Land purchased for Rs 1,10,000, Also paid Rs 5,000 for land revenue.
vi. Fees paid for the renewal of license Rs 1,000.
i. Capital Expenditure: It is a capital expenditure because it is related to the purchase of an intangible asset.
ii. Revenue Expenditure: It is revenue expenditure because it is incurred under the normal course of business for the maintenance of machinery.
iii. Capital Expenditure: It is a capital expenditure because it is an initial expenditure incurred for starting a new business.
iv. Capital Expenditure: It is a capital expenditure because it is paid for acquiring a new asset.
v. Agriculture Land purchased for Rs 1,10,000 is a capital expenditure as it is related to the purchase of an asset and land revenue of Rs 5,000 is a revenue expenditure.
vi. Revenue Expenditure: It is revenue expenditure because it is paid for the renewal of the license and not for obtaining a new license.
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