Describe what capitalize means What is the difference betwee

Describe what “capitalize” means. What is the difference between a capital expenditure and a revenue expenditure?

Solution

Capitalize means shifting of recording of expenses in financial statements to later periods. Expenses incurred on purchase of assets which are intended to provide benefit for a period of more than one year are capitalize and then record systematically as expenses over the life of asset by way of depreciation. Thus capitalize means distributing burden of expenses over the period during which expected benefits from the expenses are likely to occur.

Expenditure can be divided in two categories on the basis of its accounting treatment. Capital expenditure and revenue expenditure. Capital expenditure are those expenses whose benefits are likely to occur over a period of time and is not limited in a single period. Expenses incurred on purchase of long term assets like plant and machinery, building are categorize as capital expenditure and provide benefits to the business for more than one year. These expenditures are generally high in amount as compared to revenue expenditure.

Revenue expenditure are those expenditure which are incurred to meet daily requirements of the business and which are consumed within a given accounting period. Routine expenses which are required to run daily operations like salaries, rent are fall under this category.