For example, carriage, office, admin, and stationary expenses e.t.c. Capital expenditure: It refers to the amount spent on acquiring, maintaining, and improving the fixed assets that increases its productivity or extends useful life. The major difference between the two is that the Capital expenditure is a one-time investment of money. The term is generally restricted to expenditures that add fixed assets or that has the effect of increasing the capacity, efficiency, life span, or … Worksheet-1: Capital and Revenue Expenditure 3. Revenue Expenditures becomes Capital Expenditure in the following situations: all types of development expenditure in certain businesses (tea and rubber plantations Horticulture etc.) It was held that this payment by the company was contingent and therefore not deductible for income tax purposes. Financial charges on loan given or undertaken by the company. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. 43 OF 1975, Supreme Court (cited +410 times). The question about the nature of expenditure has always been a highly contested issue in tribunals and courts in India. This was not covered by insurance. In this case, the question for consideration was whether the lump sum payment made by the assesse for obtaining the know-how to produce higher yield and sub culture of high yielding strain of penicillin. Amount received from IDBI as a medium term loan for augmenting working capital. How to account for capital expenditure and revenue expenditure. The purchase of loom hours did not create any new assets nor was there any expansion of the factory. Distinguish between capital and revenue expenditure 2. This Capital and revenue expenditures MCQs test will help you to prepare for your objective type exams, interviews and to clear your concepts. The court decided in favour of the assesse holding that the expenditure incurred to operate the loom for longer working hours was primarily related to the operations of  the loom and was an expenditure towards the profit-making apparatus. paying for materials, staff costs) which is known as "revenue expenditure".The distinction between capital and revenue expenditure is quite an important one. However, some broad and general tests have been suggested from time to time to ascertain on which side of the line the outlay in any particular case might reasonably be held to fall. A loan is a liability and has to be repaid and, in our opinion, it is erroneous to consider a liability as an asset or an advantage within the test laid down by Viscount Cave and approved and applied by this Court in many cases.”, CIVIL APPEAL NO. Capital expenditure is expenditure relating to the purchase of non-current assets which are not for resale and are used within the business. Questions from 1 to 10. A capital expenditure (“CapEx” for short) is the payment with either cash or credit to purchase long term physical or fixed assets used in a business’s operations. The business expenditures are of two types:- Capital expenditures Revenue expenditures Capital expenditures Definition and explanation of capital expenditures: An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. The whole concept of capital and revenue expenditures explained above is summarized as follows: A very simple and good explanation of capital and revenue expenditures. 1191 OF 1974, Supreme Court (cited +230 time). Every year, a part of the asset is “used up”. It is important to correctly differentiate between the two. Revenue expenditures are usually less expensive than capital expenditures, small enough to be expensed against a shorter revenue period. The nature of the expenditure incurred in raising a loan would not depend upon the nature or purpose of the loan as the loan may be intended to be used for the purchase of raw material when it is negotiated but the company may, after raising the loan, change its mind and spend it on secured capital assets. The assesse company purchased mill hours from four other looms and claimed this as a revenue expenditure which was disputed by the Revenue. A debt recorded as bad in the earlier year recovered during the year is a A] Revenue receipt B] Revenue expenditure C] Capital expenditure D] Capital receipt 11. (c) Capital expenditures (d) Revenue expenditures 19. (a) Capital expenditure (b) Revenue expenditure 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. 2,500 spent on the overhaul of machines purchased second-hand. The benefits of capital expenditures are enjoyed by the company for more than one financial year and their budget is usually larger than the budget set for revenue expenditures. B] Revenue expenditure C] Capital expenditure D] Capital receipt 10. Material Facts About John’s Prepaid Rent. The court held that the test of long and enduring benefit cannot be applied in the current case, for classifying the transaction as a capital expenditure. Day-to-day expenses incurred by the company. You may click the link to find Multiple choice questions (Q.No-1 to 10) on Capital and Revenue Receipts and Payments.. Explore the other resources for Capital and Revenue Expenditure. Classification of these transactions reflects in the final statements of the company. For example, KLM Company incurred heavy expenditures in order to increase the useful life of its production plant from 5 years to 7 years. Capital Expenditure vs Revenue Expenditure. The following objectives are covered in this lesson: The court held that loan obtained cannot be treated as an asset or advantage of an enduring nature for the benefit of the business of the assessee, as, a loan is a liability and has to be repaid and it is therefore, erroneous to consider the liability as an asset or an advantage. expenditure? In order to extract oil, it has to buy exploration rights. Questions from 11 to 20. “In our opinion, the payment was not merely contingent but the liability itself was also contingent. The plant is a fixed asset that will be used for many years by the company. The court held that the assessee has to employ professionals whose job is to continuously upgrade the software and provide newer features and updates on are gular basis. One of the examples of revenue expenditure which could serve as a … Therefore, to ensure marketability of the existing repeated and constant cost had to be incurred to upgrade and remove glitches etc. Revenue expenditure is expenditure which is incurred for the purpose of the trade of the business or in order to … The members of association entered into an agreement restricting the number of working hours per week to run their looms. The test of enduring benefit is, therefore, not acertain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”, India Cements Ltd. vs.Commissioner Of Income Tax, CIVIL APPEAL NO. The trustees were to spend this sum to take an annuity policy for the managing director. A business expenditure is an outflow of economic resources (mostly in the form of cash and cash equivalents) as a result of undertaking various activities during the normal course of business and to further the objectives of a particular business function. ... Case 3-81 CONTINUING PROBLEM: FRONT ROW ENTERTAINMENT Cam and Anna are very satisfied with their first month of... Cornerstones of Financial Accounting. Here, we have discussed most important cases explaining the concept of expenditure. Solved Example and Problem 2: 1106 OF 1964, Supreme Court (cited +411 times). In case the expenditure is not incurred on the said capital asset the same would become unsalable and obsolete. Expenditure means spending on something. Explanations, Exercises, Problems and Calculators. A capital expenditure is an amount spent to acquire or significantly improve the capacity or capabilities of a long-term asset such as equipment or buildings. Capital and revenue expenditures are two different types of business expenditures that we often find in financial accounting and reporting. (d) Capital Expenditure = Purchase of business means purchase of its assets and liabilities; therefore, it is a capital expenditure. Failure to make distinction between capital and revenue items will result in A] under trading If you find any problem while answering the questions we advise you to read Capital and Revenue Expenditures Chapter thoroughly from Financial Accounting section of Play Accounting. Show your love for us by sharing our contents. The director was alive then and it was not known whether any pension would be payable to him at all. Receipts and invoices keep the records of expenditures. What is a capital expenditure versus a revenue expenditure? 25612 Crore. Usually the cost is recorded in a balance sheet account that is reported under the heading of Property, Plant and Equipment. 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. Incorrect treatment of expenditure . For example: revenue expenditures are shown in the profit and loss account as their benefits are for one accounting period i.e. In the present case, nothing more was done in the accounting years. Depreciation on a Machinery. (a) Capital expenditures (b) Revenue expenditures (c) Capital receipt (d) Revenue receipt 20. 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