The Finance Guru is back with yet another informative video that will solve all your queries about things that should be keep in mind.Today’s topic of discussion ‘Difference Between Capital Expenditure and Revenue Expenditure’.
Ladies and gentlemen boys and girls your friend vishal tucker is back with yet another video and today’s discussion is capital expenditure versus revenue expenditure now how do you identify whether a money going out or a cash outflow is a capital expenditure or a revenue expenditure now the differentiation is very very important here because all expenditures which
Are of capital nature go to balance sheet and most probably depreciation is claimed on them over a period of time and all expenditure which are revenue in nature directly go to pnl or income statement and are written off in the current year so the best way to identify whether a cash outflow is of capital nature or revenue nature is simple you look at the benefit
Achieved out of it if money is going out and the corresponding benefit to the company is of a long term nature then it has to be capital expenditure however if the money going out and the corresponding benefit is of a short term nature then it will be revenue expenditure so friends what is long term and what is short term generally in in common parlance we can
Say anything which is greater than 12 months is perceived as long term so any expenditure which users benefits for more than twelve months it could be a capital expenditure for example buying a new machinery if the machinery is useful life is 10 years it is definitely a capital expenditure because it gives a corresponding benefit of long term nature however let’s
Say paying salary to an employee is a short-term benefit because every month we have to pay the salary and the employee will work only for one month for a month salary so it’s a revenue expenditure however there are instances of expenditure which are usually in revenue but are capitalized and also the other way round for example books books are typically long
Term benefit giving items but however they write it off as revenue expenditure in in in your books of accounts installation charges paid to laborers for installing a new machine our revenue in nature because they are wages however because they were incurred in relation to installing a new machine which will give us a long term benefit they will be capitalized so
You have to look at the situation and classify the expenditure also most capex outflows are large in magnitude and most revenue outflows are small in magnitude but again not necessarily most important point here is an expense which is between capital and revenue it is called a deferred revenue expenditure so when let’s say a decade ago when lnt cement sold off
Its cement division to ultratech cement ultratech incurred a lot of money for advertising now let’s say for simplicity sake we assume it to be ten crores and you’ve seen those tv ads where you know the hat was changed from ln t2 ultra tag the walls were changed the curtains were changed stating ln t cement is now ultratech cement so if they debit the entire ten
Kilos of advertising in the first year itself the first year will show huge loss and subsequent years will show extra normal profit because of the benefit of that advertising accruing to ultratech over a period of time so what they did they use one of the pillars of accounts one of the basic pillars of accounts called matching costs with revenue and they converted
This revenue expenditure into capital expenditure and wrote it over four years so this 10 crore was broken into 4 parts 2 & a half crore each first year they put two and half throws in pnl and seven and a half crores in the balance sheet assets side as a last item miscellaneous expense to the extent not written off and they took it to subsequent deals so on
In second third and fourth year and this is how they forcefully capitalized the revenue expenditure to show a proper trend in profits also there is one very well-established pillar of accountancy or gaap which says that you can only recognize an expense of a particular item in that year in the year in which the corresponding benefit arises shortly summarised as
Matching costs with revenue so more basics of accounts more details continue to watch our videos and don’t forget to subscribe financed you today let’s discuss the five key risks of investing through an siv risk number one if you take an si p of a diversified equity mutual fund
Transcribed from video
Difference Between Capital Expenditure and Revenue Expenditure | Vishal Thakkar By Finance Tube
