Expenditure: Capital vs Revenue in Nature?
by Muhammad Sajjad
Q: State with reasons whether the following expenditure items are capital or revenue in nature:
- Purchase of Land.
- Installation of Plant and Machinery
- Expenditure incurred during the erection of Machinery.
- Commission paid to a worker.
- Repair of truck met with an accident.
- Repair charges of furniture.
- Paid wages to factory workers.
- Paid advertisement expense.
A: Let's first make sure we understand what we mean by capital versus revenue in nature.
In a nutshell, a transaction that is capital in nature deals with long-term items, i.e. assets, liabilities or owner's equity.
In contrast, a transaction that is revenue in nature deals with short-term items - i.e income and expenses.
Here are the answers:
- Capital. Land is a non-current (long-term) asset.
- Capital. installation costs form part of an asset's cost. Since assets are long-term, so are installation costs.
- Same as b). Erection costs form part of the cost of the machinery (or other asset).
- Revenue nature. Commission and other employee costs (salaries and wages) are expenses.
- Revenue. Repairs and maintenance are expenses. (In contrast, improvements are capital as they result in an asset with higher value. Repairs and maintenance maintain an asset's value - they do not improve it - so these are counted as expenses.)
- Same as e)
- Same as d)
- Revenue. Advertising is an expense.
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