Question

'Whether an expenditure is of revenue or capital nature, is a question of fact and must depend on the circumstances of each case." Comment, giving appropriate examples.

Answer 1

The phrase, "Whether an expenditure is revenue or capital, is a question of fact and must depend on the circumstances of each case," is highly appropriate. Some expenses are revenue-generating, but are not classified as such.

The following expenses are revenue in nature, but are considered capital expenditure in the following situations:

1. Raw Materials and Stores: When these are used for manufacturing a fixed asset, these expenses are treated as capital expenditure.
2. Carriage and Freight: If these expenses are paid on the transportation of newly acquired fixed asset, these are treated as capital expenditure.
3. Wages: Wages paid for the construction of a building or for the installation of a machine are treated as capital expenditure and are added to the cost of the asset.
4. Repairs: Expenses incurred to repair a-second hand machine, purchase by the firm, to make it usable are treated as capital expenditure.
5. Preliminary Expenses: Expenses incurred on the formation of a company are treated as capital expenses because their benefit will be available over a long period.
6. Brokerage: Bookerage paid on the purchase of a fixed asset is treated as capital expenditure.
7. Legal Expenses: Stamp duty and other legal expenses incurred in connection with the acquisition of fixed assets is treated as capital expenditure.
8. Advertising: Advertising expenses incurred for introducing a new product in the market are treated as capital expenditure.
9. Interest: Interest paid on loan and capital when paid during the construction of a fixed asset is treated as capital expenditure.