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What is the difference between Capital expenditure and
Revenue expenditure?
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Answer Posted / akanksha saini
CAPITAL EXPENDITURE
Outlay resulting in the increase or acquisition of an asset
or INCREASE in the earning capacity of a business
REVENUE EXPENDITURE
Outlay as is necessary for the MAINTENANCE of earning
capacity including the upkeep of the fixed assets in a fully
efficient state.
SALIENT POINTS TO NOTE
1. Accounting fraud occur because management choose to
classify should be revenue expenditure as capital
expenditure. The should be revenue expenditure should be
taken up into the Income Statement but instead now being â
€œsuspended†or deferred into the Balance Sheet. In the
process, lesser expenses are being charge into the Income
Statement, hence profit are overstated to impress the
investors or outsiders
2. Strong GAAP and Accounting standards have classified
what should be assets, what should be deferred in the
balance sheet so that there should be a clearer
demarcation between Capital and Revenue expenditure
3. We need to note that certain expenses are recognized as
being of a capital nature, although no tangible property may
have been acquired as a result. Examples are research and
development expenditure, pre-incorporation and preliminary
expenses, interest on borrowings for building, legal
expenses to acquire property, additional renovations to
properties and others
4. The classification of what is capital expenditure of a
company might not applies to another company that is not in
the same industry. Say in a property based company, most
land and buildings are revenue expenditure as they are
purchase with the intent for re-sale.
5. As we learned from the above, when the purpose of
expenditure is to Maintain the business it is revenue and if
it is to Improve the business it is capital. However, at
times in a company, the classification of pure capital or
revenue expenditure in a company is not so straightforward
especially when there is a mixture of both capital and
revenue expenditure in nature.
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