Classification of expenditure

Classification of expenditure

Expenditures may be classified into the following three categories:

i.               Capital expenditure

ii.               Revenue expenditure

iii.               Deferred revenue expenditure.

1. Capital expenditure

It is an expenditure incurred during an accounting period, the benefits of which will be available for more than one accounting period. It includes any expenditure resulting in the acquisition of any fixed asset or contributes to the revenue earning capacity of the business. It is non- recurring in nature.

Features of capital expenditure

Following are the features of capital expenditure:

·           It gives benefit for more than one accounting period.

·           It includes acquisition of fixed assets and all expenditure incurred upto the point an asset is ready for use.

·           It contributes to the revenue earning capacity of the business.

·           It is non-recurring in nature.

·           It is shown on the assets side of the balance sheet.

Examples

·           Cost of acquisition of land and building.

·           Cost of acquisition of office equipment, computer and air-conditioner.

·           Cost of acquisition of plant and machinery including installation charges and trial run.

2. Revenue expenditure

The expenditure incurred for day to day running of the business or for maintaining the earning capacity of the business is known as revenue expenditure. It is recurring in nature. It is incurred to generate revenue for a particular accounting period. The revenue expenditure may be incurred in relation with revenue or in relation with a particular accounting period. For example, cost of purchases is a revenue expenditure related to sales revenue. Rent and salaries are related to a particular accounting period.

Features of revenue expenditure

Following are the features of revenue expenditure:

·           It is recurring in nature.

·           It is incurred for maintaining the earning capacity of the business.

·           Its benefit expires in the same accounting period.

·           It is shown on the debit side of the trading and profit and loss account.

Examples

·           Purchase of goods for resale.

·           Administrative, selling and distribution expenses.

·           Manufacturing expenses.

3. Deferred revenue expenditure

An expenditure, which is revenue expenditure in nature, the benefit of which is to be derived over a subsequent period or periods is known as deferred revenue expenditure. The benefit usually accrues for a period of two or more years. It is for the time being, deferred from being charged against income. It is charged against income over a period of certain years.

Features of deferred revenue expenditure

Following are the features of deferred revenue expenditure:

·           It is a revenue expenditure, the benefit of which is to be derived over a subsequent period or periods.

·           It is not fully written off in the year of actual expenditure. It is written off over a period of certain years.

·           The balance available after writing off (i.e., Actual expenditure - Amount written off) is shown on the assets side balance sheet.

Examples

·           Considerable amount spent on advertising

·           Major repairs to plant and machinery