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ß The use of goods and services in order to earn revenue is the
expense.

ß Hendriksen opines, "expenses are the using or consuming of

goods and services in the process of obtaining revenues".

ß "Expense is the expired cost, directly or indirectly related to

given fiscal period, of the flow of goods or services into the
market and of related operations."
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ß Expenditure incurred during the fiscal period and related to
same accounting period becomes an expense i.e. expired cost
of that period.

ß Expenditure incurred during the previous accounting period

but related to current accounting period becomes an expense
i.e. expired cost of the current accounting period e.g. prepaid
expenses.

ß Expenditure related to the current accounting period but not

paid becomes outstanding expenses.
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a) Capital expenditure; and

b) Revenue expenditure.
 














 











 











 





  

   

  










 












 



 


 






  

     

     
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Upgrade Maintain
Extend Replace
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Remedial
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ß Capital expenditure consists of expenditure, the benefit of
which is not fully enjoyed in one accounting period but spread
over several accounting periods.
ß It includes assets acquired for the purpose of earning income
or increasing the earning capacity of the business or effecting
economy in the operation of an asset.
ß These are not meant for sale.
ß Expenditure incurred for improving assets and extending an
existing asset is also capital expenditure.
 _

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ß The sum of invoice price, freight and insurance charges,
installation and erection cost and custom duty etc. will be
capitalized in the books of a firm.
ß These capital items appear on the assets side of Balance Sheet.
 _

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ß Interest on capital paid during the period of construction of
Company u/s 208 of Indian Companies Act)
ß Expenditure in connection with or incidental to the purchase or
installation of an asset.
ß Acquisition of new assets.
ß Expenditure incurred for putting the old asset purchased, into
working condition.
ß Additions and extensions to existing assets.
ß Interest and financing charges paid, brokerage and commission paid.
ß Betterment of fixed assets or improvement of an asset to produce
more, to improve its earning capacity or to reduce its operating
expenses or to increase the life of asset.
 _

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ß The cost of assets will be written off by way of depreciation
over a period of its life.
ß The amount of depreciation is a revenue expenditure and is
debited to profit and loss account.
ß The reason for charging depreciation to revenue i.e. profit and
loss account is that the asset is used for earning revenue.
ß Hence the depreciation is charged to profit and loss account.
ß Thus, the benefit of capital expenditure does not exhaust in
one year but extends over a number of years of its use or life
of the asset.
 
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ß Revenue expenditure consists of expenditure incurred in one
period of the accounting, the full benefit of which is enjoyed in
that period only.
ß This does not increase the earning capacity of the business but
it is incurred in order to maintain the existing earning capacity
of the business.
ß It includes all expenses which arise in normal course of
business.
ß The benefit of such expenditure is for a short period, say, one
year only and it is not to be carried forward to the next year.
ß The expenditure is of a recurring nature i.e. incurred every
year.
 
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ß |urchase of raw materials for conversion into finished goods.
ß Selling and distribution expenses incurred for sale of finished
goods e.g. sales office expenses, delivery expenses,
advertisement charges, et

ß Establishment expenses like salaries, wages, rent, rates, taxes,
insurance, depreciation on office equipment.
ß Depreciation of plant, machinery and equipment.
ß Expenses incurred in order to maintain the existing fixed assets
in an efficient and workable state such' as repairs to building,
repairs to plant, white-washing and painting of building.
 
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ß All these items appear on the debit side of trading and profit
and loss account, in case of trading concerns or income and
expenditure account, in case of non-trading concerns.
 `
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ß Deferred Revenue Expenditure is a revenue expenditure which
has been incurred during one accounting year which is
applicable either wholly or in part to further accounting years.

ß According to |rof. A.W. Johnson,

ß "Deferred Revenue Expenditure includes those non-
recurring expenses, which are expected to be of financial
nature, distributed to several accounting periods of
indeterminate total length. These are of revenue nature but
are deferred or postponed. It is of quasi- capital nature."
 `
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ß Deferred Revenue Expenses are those expenses, the benefit of
which may be extended to a number of years, say, 3 to 5 years.
These are to be charged to profit and loss account, over a
period of 3 to 5 years depending upon the benefit accrued.
 `
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ß Sometimes losses may be suffered of an exceptional nature
- e.g. loss of an asset uninsured) due to accident or fire;
confiscation of property in a foreign country etc.
ß the amount which has not been debited to the profit and loss
account of the current year is shown in the balance sheet on
the assets side and it is known as fictitious asset.
 |
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ß |rofit and Loss Account is debited with revenue expenditure
and credited with revenue income i.e. sales income and from
other sources).
ß If the revenue income is higher than revenue expenditure, it
will be a profit and if it is less than revenue expenditure, it will
be a loss.
ß Capital expenditure is shown on the assets side of Balance
Sheet. Capital and liabilities are shown on the liabilities side of
Balance Sheet.
ß The purpose of distinction is to give "True and fair" view of
the accounts and financial position of the firm.
 _


   



ß þalue of fixed asset is understated
ß Net profit is understated
 

   




ß Revenue expenditure is treated as capital expenditure
þalue off Fixed asset is overstated
Net profit is overstated
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