Distinguish between Capital and Revenue Expenditures

Auditing and Assurance Revision Questions and Answers

A capital expenditure is that which is incurred for the under mentioned purpose:

a. Acquiring fixed assets
b. Making additions to the existing fixed assets
c. Increasing earning capacity of the business
d. Reducing the cost of production.
e. Acquiring a benefit of enduring nature of a valuable right.

Revenue expenditure is the expenditure, the benefit of which is immediately (within one year) expended or exhausted in the process of earning revenue. For example, expenditure on purchase of goods for sale, on their movement from one place to another, on maintaining assets, on keeping a business organization going etc.

If any expenditure of a revenue nature is treated as capital, it would have the effect of inflating the profit of the year. If the expenditure of a capital nature is charged to a revenue head, the amount of profit would be reduced.

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