The distinction between revenue expenditure and capital expenditure is usually made according to accounting principles.
Revenue expenditure is an expenditure that does not charge to the current period’s revenues. On the other hand, a capital expenditure is an investment in a company’s long-term assets. In accounting, a capital expenditure raises the asset value of a company and therefore affects the company’s ongoing revenues and expenses in subsequent.
Items of Revenue Expenditures That Are Capital Expenditures
Here are examples of revenue expenditure items that, under certain circumstances, become items of capital expenditure.
Generally, legal charges are revenue expenses. However, legal charges paid in connection with the purchase of property or other fixed assets such as land, buildings, furniture, machinery, and patents are items of capital expenditure.
This is because the cost of these expenditures increase in the long term.
For instance, if a construction company decides to extend its buildings, the company’s own workers are used for the extension. In this case, the wages paid for this purpose would be capitalized.
Repairs and renewals are usually treated as items of revenue charge. However, if an old asset is purchased, the amount spent on its immediate repair by the purchaser to put it in working order is capital expenditure.
Freight and Carriage
This is a revenue charge, but freight or carriage paid on a newly purchased fixed asset is an item of capital expenditure.
Brokerage and Stamp Duty
Generally, this is a revenue expenditure, but the brokerage and stamp duty paid on the purchase of property is an item of capital expenditure.
Raw Material and Stores
The cost of raw materials and stores is usually treated as a revenue charge, but the cost of any raw materials and store consumed in the making of a fixed asset must be regarded as capital expenditure.
Ordinarily, interest is an item of revenue expenditure. However, the interest on a loan taken for the purchase of any fixed asset, or on the subscribed capital during the construction period of a new company, is a capital expenditure.
Certain concerns, such as electric supplies, mining companies, tea and rubber plantations, and collieries, require a very long period of development before they can begin to earn income.
All expenditures incurred during this period are known as development expenditures. These are treated as capital expenditures, despite consisting of items such as wages, salaries, rent, and taxes.
Items of Revenue Expenditures Becoming Capital Expenditures FAQs
The cost of raw materials and stores is usually regarded as a revenue expenditure, but if those items are used for making Fixed Assets such as buildings, machinery, etc., They will be treated as Capital Expenditures.
Wages paid for this purpose will be treated as Capital Expenditures.
The cost of legal charges paid in connection with the purchase of any fixed asset is considered to be an item of Capital Expenditure.
The cost of freight or carriage paid on newly purchased Fixed Assets is an item of Capital Expenditure.
If the brokerage and stamp duty paid on the purchase of property is an item of Capital Expenditure.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.