More About Capital and Revenue Expenditures:
Capitalized or Deferred Revenue Expenditures:
Where a certain revenue expenditure incurred
is of such a nature that its benefit is likely to be spread over a certain
number of years, or where it is of non-recurring and special nature and
large in amount, in such circumstances, instead of debiting the entire
amount to the profit and loss account of the year in which it has been
incurred, it may be spread over a number of years, a proportionate amount
being charged to each year's profit and loss account. The remaining portion
of the expenditure is carried forward and is known as capital expenditure or
or deferred revenue expenditure and is shown as an asset in the balance
sheet. Item such as preliminary expenses, cost of issue of debentures are
examples that may be classified under this head.
Exceptions to General rules:
There are certain expenses which are usually
of a revenue in nature but under certain circumstances they become capital
expenditures. The following are the examples of expenses which are usually
revenue but under certain circumstances become capital.
Legal Charges:
These are, as a rule, revenue charges, but
legal charges incurred in connection with the purchase of a fixed asset are
capital expenditures as they form an additional cost of the asset acquired.
Wages:
Wages are ordinary a revenue expenditure. But
in a manufacturing business where the firm's own men are employed in making
of fixed asset, the wages paid for such purpose would be capitalized. For
example if the firm's own men are employed in making extension to the
factory building or in erection of plant or manufacturing tools for own
requirements. the wages and salaries paid to the persons are not revenue but
capital expenditures.
Brokerage and Stamp Duty:
Normally these are revenue expenditures, but
brokerage paid on acquisition of a property and stamp duty involved thereon
can be capitalized.
Freight and Carriage:
This is revenue charge, but freight and
carriage paid on newly acquired plant or fixed assets are capital
expenditures.
Advertising:
Ordinarily amount expended on advertising is
revenue charge but the cost of special advertising undertaken for the
purpose of introducing a new line of goods may be capitalized.
Development Expense:
In concern like collieries, mines, tea, rubber
etc., all expenses incurred during the period of development are treated as
capital.
Preliminary Expenses:
These are the expenses incurred in connection
with the formation of a public company. These expenses although are revenue
in nature but are allowed to be capitalized and can be shown as an asset in
the balance sheet.
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