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Wednesday, March 17, 2010

Capital Expenditure

Capital expenditure is done to acquire the fixed assets. Such fixed assets is acquired for the benefits for more than one accounting year. These expenditure help to earn income, which are shown in the assets side of the balance sheet.

According to Kohler,"Capital Expenditure is an expenditure intended to benefit future periods, in contrast to a revenue expenditure, which benefits a current period, an addition to a capital asset. The term is generally restricted to expenditures that add fixed assets units or that have the effect of increasing the capacity, efficiency, life span or economy of operation of an existing fixed asset."

The some example of capital expenditures are as follows:
  1. Expenditure done for acquiring fixed assets:
  • Purchase of land building, plant and machinery.
  • Purchase of furniture and fixtures.
  • Purchase of trade marks, patents, goodwill, copyrights, patterns and designs.
2. Expenditures incurred for putting an old asset in working condition:
  • Cost of erection of plant and machinery.
  • Cost of repairing (huge amount) fixed assets.
  • Cost of installation of new assets.
3. Expenditure incurred on an existing asset in the improvement or extension of the business:
  • Addition of land, building, machinery etc.
  • Extension of existing fixed assets.
  • Cost of increasing capacity of fixed asset.
4. Expenditure spent on raising the capital:
  • Share underwriting commission.
  • Discount or loss on issue of shares or debentures.
5. Expenditures incurred for the establishment of an organization:
  • Registration fees.
  • Legal and consultancy fees.
  • Advertisement expenses.
6. Expenditure incurred for research, development and inventions.

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