Capital Expenditure. [July 2021, 2 Marks]

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Answer Solution:  Any amount spent by actual payment or for which a liability is incurred is known as an expenditure.  Capital Expenditure is that expenditure which results in the acquisition of an asset (tangible or intangible) which can be later sold and converted into cash or which results in an increase in the earning capacity of the business or which affords some other advantage to the firm.  In a nutshell, if the benefits of an expenditure are expected to accrue for a long time, the expenditure is capital expenditure.  Obvious examples of capital expenditure are land, building, machinery, patents, etc.  All these things stay with the business and can be used over and over ·again.  Expenditure which does not result in increase in capacity or in reduction of day-to- day expenses is not capital expenditure, unless there is a tangible asset to show for it.  All amounts spent upto the point an asset is ready for use should be treated as capital expenditure.  Examples are: Fees paid to a lawyer for drawing up the purchase deed of land, overhauling expenses of second-hand machinery, interest paid on loans raised to acquire the assets but only for the period before the asset is ready for use.  Any expenditure incurred to bring such asset into usable condition for the 1st time is also a capital expenditure like installation expenses etc.  Additional expenditure on such assets in future will be capitalised only if it result into significant improvement over and above its originally assessed performance.

Capital Expenditure. [July 2021, 2 Marks]

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Capital Expenditure

Revenue Expenditure

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