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## Distinction Between Capital Expenditure & Revenue Expenditure The purpose of **capital expenditure** is to improve the business, while the purpose of **revenue expenditure** is to maintain the business. The difference between capital expenditure and revenue expenditure may not always easy. For...

## Distinction Between Capital Expenditure & Revenue Expenditure The purpose of **capital expenditure** is to improve the business, while the purpose of **revenue expenditure** is to maintain the business. The difference between capital expenditure and revenue expenditure may not always easy. For example, if an expenditure is incurred to increase the earning capacity of a cinema theatre, it is a capital as well as a revenue expenditure. For example, if an ordinary screen is changed into a wide screen, it cannot be said with authenticity whether it increases the earning capacity. One cannot state with confidence that it is a revenue expenditure, since such expenditure is not for maintaining an asset, but for changing its nature altogether. The facts and circumstances of each case will therefore, determine whether a particular expenditure is capital or revenue. It must be appreciated that an expenditure does not become capital only because it is large and revenue only because it is small. Thus, a huge factory building repaired at an expense of Rs. 50,00,000 is revenue expenditure. But, a small machine purchased for Rs. 900 is a capital expenditure. The characteristic of an expense in the hands of the spender does not depend on the characteristic of the receipt in the hands of the **receiver**. A businessman pays fees to an architect for supervision of construction of his office building. For the architect, this is a revenue receipt, but, for the businessman, it is a capital expenditure. Similarly, a **revenue expenditure for the payer may be a capital receipt for the receiver.** If a dealer in second-hand machines purchases a machine used as a fixed asset by the seller for Rs. 10,000, the payment of this sum is a revenue expenditure for him. However, its receipt for the seller is a capital receipt. There are certain expenses which are basically revenue in nature, but for accounting purpose are written off over a number of years. The common examples are: - Preliminary and formation expenses of a limited company. - Cost of issue of shares and debentures. - Cost of developments and experiments for the expansion of a business. - Interest on capital paid during the period of construction.