Accountancy · Ch 6 — Financial Statements - I
Expenditure
Expenditure
Expenditure
Whenever a business makes a payment or incurs an outlay for any purpose other than settling an existing liability, that outlay is called expenditure. The key idea is that expenditure is incurred because the business expects to receive some benefit from it. The nature of that benefit — how long it lasts — determines how the expenditure is treated in the accounts.
Revenue Expenditure
If the benefit of an expenditure lasts only for the current accounting period (one year or less), it is called revenue expenditure. These are the routine, day-to-day costs of running the business. For example, salaries paid to employees and rent paid for the office premises are revenue expenditures. The salaries paid this year do not give any benefit next year — the workers have already done their work for this period. Next year, if they work again, they will have to be paid fresh salaries.
Revenue expenditure is incurred to maintain the earning capacity of the business, not to increase it. It is generally recurring in nature — you pay salaries every month, rent every month, etc.
Capital Expenditure
If the benefit of an expenditure extends beyond one accounting period (i.e., for several years), it is called capital expenditure. These are outlays made to acquire long-term assets that will be used in the business for many years. For example, buying furniture for ₹50,000 is a capital expenditure — that furniture will be used for, say, five years, giving benefit each year.
Capital expenditure increases the earning capacity of the business. It is incurred to acquire fixed assets (like machinery, furniture, buildings) or to make additions/extensions to existing fixed assets. It is generally non-recurring in nature.
Distinction Between Capital and Revenue Expenditure
| Basis | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Purpose | Increases earning capacity | Maintains earning capacity |
| Nature | Acquires fixed assets for operations | Day-to-day conduct of business |
| Recurrence | Generally non-recurring | Generally recurring |
| Benefit period | More than one accounting year | Normally one accounting year |
| Accounting treatment | Recorded in the Balance Sheet (subject to depreciation) | Transferred to Trading and Profit & Loss Account (subject to adjustments for outstanding/prepaid amounts) |
Deferred Revenue Expenditure
Sometimes, an expenditure that is revenue in nature (like advertising) is incurred in a very large amount. While advertising is normally a revenue expense, a heavy advertising campaign may give benefits for more than one accounting period. Such expenditures are called deferred revenue expenditure. They are treated like capital expenditure — the total amount is not charged entirely to the current year's Profit & Loss Account. Instead, it is written off (spread as an expense) over the expected period of benefit.
Do not confuse deferred revenue expenditure with capital expenditure. Deferred revenue expenditure is still revenue in nature — it just happens to give benefit over multiple years. Capital expenditure gives benefit over multiple years AND creates a fixed asset.
Expenditure vs. Expense
Expenditure is a broader term. It refers to any outlay made by the business. The part of that expenditure that is actually used up or consumed in the current year is called an expense of that year.
- Revenue expenditure is treated as an expense of the current year and is shown in the Trading and Profit & Loss Account. Example: Salary paid is an expense of the current year.
- Capital expenditure is not fully treated as an expense in the year of purchase. Instead, it is charged to the Profit & Loss Account over the asset's useful life as depreciation. For example, furniture costing ₹50,000 expected to last 5 years will be treated as an expense of ₹10,000 per year (depreciation).
- Deferred revenue expenditure is also written off over its expected period of benefit, just like capital expenditure.