I have received some emails where some accountant still confused about difference between capital and revenue expenditure. They want to know what are rule which will helpful for decision for making difference between capital and revenue expenditure. You must know that there is no a single term ofaccounting at random . At a stretch practice , you can understand what is real difference between capital and revenue expenditure . But here, I am providing some rules which will be helpful to you to decide that any expense is revenue or capital nature .
Ist Rule
All expenses which are done for getting any fixed asset must be capital expenditure. For example, expenses of carriage and freight for getting fixed assets are also capital expenditure and will include in the total cost of fixed assets.
2nd Rule
All expenses which are done for increasing the size or improvement in fixed assets must be capital expenditure.
3rd Rule
All expenses which are done for getting share capital or long term loan must be capital expenditure.
4th Rule
Look also nature of business , if business is relating to general goods sale -purchase transaction then above three rules will applicable but , if nature of business shows dealing in above transaction , then above transaction becomes revenue expenditure .
5th Rule
Legal judgments is also so important for taking decision , Like Income tax law 1961 has provided some rule regarding assessment of business and profession . These rules also give good guidance for making difference between revenue and capital expenditures.
Ist Rule
All expenses which are done for getting any fixed asset must be capital expenditure. For example, expenses of carriage and freight for getting fixed assets are also capital expenditure and will include in the total cost of fixed assets.
2nd Rule
All expenses which are done for increasing the size or improvement in fixed assets must be capital expenditure.
3rd Rule
All expenses which are done for getting share capital or long term loan must be capital expenditure.
4th Rule
Look also nature of business , if business is relating to general goods sale -purchase transaction then above three rules will applicable but , if nature of business shows dealing in above transaction , then above transaction becomes revenue expenditure .
5th Rule
Legal judgments is also so important for taking decision , Like Income tax law 1961 has provided some rule regarding assessment of business and profession . These rules also give good guidance for making difference between revenue and capital expenditures.
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