Question

Explain the rules for deciding whether any expenditure is of a capital or a revenue nature.

Answer 1

Rules for deciding whether any expenditure is of a capital or a revenue nature are as follows:

1. Any expenditure that adds to the assets of the business is a capital expenditure.
2. Any expenditure the benefit of which lasts only for the current accounting year is a revenue expenditure.
3. An expenditure will not be a capital expenditure simply because the amount involved is large.
4. Revenue expenditure does not result in acquisition of any asset but is incurred to meet day to day needs of business.
5. Any expenditure that increases the earning capacity of a business is a capital expenditure.