How do I identify capital expenditure and revenue expenditure in CA Foundation questions?
GradeHunt_TeamGradeHunt Team · · CA Foundation
In CA Foundation Accounting, I lose marks on capital vs revenue expenditure questions. Things like repairs, installation charges and legal fees confuse me.
capital expenditurerevenue expenditureca foundationaccounting
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Ask one question: does this spending give a benefit beyond the current year, or create or improve a fixed asset? If yes, it is capital. If it only keeps the business running this year, it is revenue.
Capital expenditure:
- Buying a fixed asset, including all costs to bring it to working condition: freight, installation, cartage, trial-run costs.
- Increasing capacity or life of an existing asset, for example adding a floor to a building.
- Legal charges for buying land or a building.
Revenue expenditure:
- Running costs: wages, salary, rent, electricity.
- Repairs and maintenance that only keep an asset in normal working condition.
- Legal fees for routine matters, like recovering debts.
Commonly confused items:
1. Repairs to a second-hand machine bought in poor condition, to make it usable: capital (part of cost of acquisition).
2. Wages paid to workers for installing new machinery: capital, added to the machine.
3. Replacement of a small worn-out part with an identical part, as routine upkeep: revenue. Under AS 10 (Property, Plant and Equipment), when a part needs replacing at regular intervals (for example, relining a furnace), the cost of the new part is added to the asset's carrying amount if it meets the recognition criteria, and the carrying amount of the replaced part is derecognised.
4. Heavy advertising expenditure whose benefit may last several years: some older textbooks call it deferred revenue expenditure, but under AS 26 (Intangible Assets) advertising and promotional costs are recognised as an expense when they are incurred. Treat it as revenue expenditure.
Exam tip: write the reason in brackets next to each classification, like "Capital (installation cost to bring machine to working condition)". In borderline cases, a clear reason shows how you reached your answer.
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