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Capital vs. Revenue Expenditure
Correct classification of expenditure is fundamental to proper profit calculation:
| Dimension | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Nature | Long-term benefit (>1 year) | Short-term benefit (≤1 year) |
| Accounting treatment | Capitalised → Balance Sheet; depreciated over life | Expensed → P&L Account in current year |
| Effect | Creates/improves fixed asset | Maintains asset; covers operating costs |
| Examples | Buying machinery, building extension, patent purchase | Repairs, salary, rent, raw material, electricity |
| Error consequence | If capital charged to revenue → understates profit (over-expenses) | If revenue capitalised → overstates profit (under-expenses) |
Deferred Revenue Expenditure: Expenditure of revenue nature but with benefit lasting several years — spread over those years. Example: Heavy advertising spend (₹10 crore) for brand launch — may be spread over 3–5 years. However, Ind AS is restrictive about deferring such costs.