Capital expenditures include fixed assets or the expenditures which are incurred in current financial year but are to be spread over more than one financial year. All the expenditures which relate to acquisition of permanent assets and are intended to be used in the business for the purpose of earning revenue are called capital expenditures. Normally, these assets have a long life and never meant for re-sale. All the expenses relating to purchase of fixed assets are called capital expenditure. Thus, the term – capital expenditure is generally used to signify the following:-
- Increase in quantity of fixed assets:- It means the purchase of new assets will be treated as capital expenditure.
- Increase in quality of fixed assets:- Some time major expenditure is done on the repair or modification of fixed assets to increase the capacity of the assets. These expenditures are called as capital expenditures.
- Replacement of fixed assets:- When any expenditure is made on the replacement of old fixed assets with the new fixed assets then also these expenditures are called capital expenditures.
- Wages and erection expenses on erection of plant or machinery, cartage in respect of the erected machines will be treated as capital expenditures.
- Expenditures incurred for acquiring the patent rights, copyrights, and goodwill are the capital expenditures.
- Stamp duty and legal charges relating to purchase of assets will be capital expenditure.
- Wages, cartage and other installation charges for any fixed asset will be called capital expenditures.
- Amount paid to architect in respect of the fixed assets will be capital expenditure.
Accounting Treatment of Capital Expenditures
If the fixed assets are purchased then these are debited in individual name and cash or bank or supplier’s account are credited as per the transaction.
If there is a capital expenditure other than fixed assets then that particular expenditure account is debited and cash or bank or supplier’s account is credited.
Treatment of Capital Expenditures in final accounts
Capital expenditures in respect of other cases are also shown in assets side of balance sheet. Only the written off portion of capital expenditure is shown in profit and loss account in expenses side.
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