Comparison in between Capital Expenditure and Earnings Expenditure, take a look at distinction between capital Expenditure and Revenue Expense.
Capital Expenditure: This represents expenditure incurred for the purpose of getting a set property which is meant to be utilized over long term for making revenues there from. e. g. quantity paid to purchase a computer system for office usage is a capital expenditure. Sometimes expenditure may be sustained for boosting the production capability of the device. This also will be a capital expenditure. Capital investment forms part of the Balance Sheet.
Revenue expenditure: This represents expense incurred to earn revenue of the present duration. The advantages of earnings expenses get exhausted in the year of the incurrence. The earnings expense results in reduction in profit or surplus.
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Contrast Chart
| BASIS | CAPITAL INVESTMENT | EARNINGS EXPENDITURE |
|---|---|---|
| Meaning | The expenditure sustained in obtaining a capital property or improving the capacity of an existing one, resulting in the extension in its life years. | Expenses sustained in controling everyday activities of business. |
| Term | Long Term | Short Term |
| Capitalization | Yes | No |
| Displayed In | Income Declaration & Balance Sheet | Income Declaration |
| Investment | Non-recurring | Repeating |
| Benefit | More than one year | Only in existing accounting year |
| Earning capability | Seeks to enhance earning capacity | Maintain making capacity |
| Matching concept | Not matched with capital receipts | Matched with income invoices |
Comparison between Capital and Deferred Revenue Expenditure:
The main feature of capital expenditure is that it leads to a benefit which will accumulate to business enterprise for a long time, state 10 or 15 years. Deferred earnings expenditure also results in an advantage which will accumulate in future period however generally for 3 to 5 years.
The capital investment or the resulting asset is usually efficient in being reconverted into cash though may be at a loss. This is not possible when it comes to deferred income expense. Sometimes, heavy loss such as loss due to earthquake is dealt with as delayed income expense in the sense that they are crossed out over a period of 3 to 5 years. Such a loss can not be dealt with as a capital expenditure.
Capital Expenditure
Capital investment can be specified as expenditure incurred on the purchase, change or improvement of set assets. The purchase of an automobile to be usage to deliver items is capital expense. Consisted of in capital investment are such costs as:
- Delivery of fixed possessions;-LRB-
- Setup of set assets;-LRB-
- Enhancement (however not repair) of fixed assets;-LRB-
- Legal expenses of buying residential or commercial property;-LRB-
- Demolition costs;-LRB-
- Architects costs;-LRB-
Profits Expenses
Earnings expense is expense sustained in the running/management of the business. For example, the cost of gas or diesel for cars and trucks is profits expense. Other income expense:
- Maintenance of Fixed Assets;-LRB-
- Administration of the business;-LRB-
- Selling and distribution costs.
Deferred Revenue Expenses
Deferred profits expenditures represent particular types of assets whose usefulness does not expire in the year of their event but generally expires in the near future. These kind of expenditures are continued and are written off in future accounting periods. Sometimes, we make some revenue expense however it ultimately becomes a capital property (usually of an intangible nature). If one undertake substantial repair work to the existing structure, the wear and tear of the facilities may be prevented. We may engage our own employees to do that work and pay them at prevailing wage-rate, which is of a profits nature.
If this expense is dealt with as profits expense and the current year’s- earnings is charged with these costs, we are making the existing year to absorb the entire expenses, though the benefit of which will be enjoyed for a number of accounting years. To overcome this trouble, the entire expenditure is capitalised and is included to the possession account.
A business can pay an insurance premium in advance, say, for a 3 year period. Just a portion of the overall premium paid must be treated as an earnings expense (portion pertaining to the current period) and the balance need to be brought forward as a possession to be written off in subsequent years.
AS 26– Intangible Possession does decline this view. Para 56 states, Expenditure sustained to provide future economic benefit to an enterprise that can be recognized as an expense when it is sustained. e.g., expense sustained on Scientific Research study is recognized as a cost when it is incurred ‖. In short, the entire quantity of expense is dealt with as expenditure for the existing year only and will not proportionately be transferred as deferred charge.
Advised
- Accumulated Liabilities
- Limitations of Accounting
- Depreciation Guidance Note
- Capital Structure
- Book Keeping
- Interest on Capital
- Accounting Estimates
- Double Entry System
