Expenditure: Capital vs Revenue in Nature?

by Muhammad Sajjad
(Pakistan)

Q: State with reasons whether the following expenditure items are capital or revenue in nature:

1. Purchase of Land.


2. Installation of Plant and Machinery


3. Expenditure incurred during the erection of Machinery.


4. Commission paid to a worker.


5. Repair of truck met with an accident.


6. Repair charges of furniture.


7. Paid wages to factory workers.


8. 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:

1. Capital. Land is a non-current (long-term) asset.


2. Capital. installation costs form part of an asset's cost. Since assets are long-term, so are installation costs.


3. Same as b). Erection costs form part of the cost of the machinery (or other asset).


4. Revenue nature. Commission and other employee costs (salaries and wages) are expenses.


5. 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.)


6. Same as e)


7. Same as d)


8. Revenue. Advertising is an expense.