A capital expenditure is that which is incurred for the undermentioned purposes:
- Acquiring fixed assets, i.e., assets of a permanent or a semi-permanent nature, which are held not for resale but for use with a view to earning profits.
- Making additions to the existing fixed assets.
- Increasing earning capacity of the business.
- Reducing the cost of production.
- Acquiring a benefit of enduring nature of a valuable right.
The different forms that capital expenditure takes are: land; building; plant and machinery; electric installations; premium paid for the lease of a building; development expenditure on land; and goodwill; etc. Expenses which are essentially of a revenue nature, if incurred for creating an assets or adding to its value or achieving higher productivity, are also regarded as expenditure of a capital nature.
Examples :
- Material and wages-capital expenditure when expended on the construction of a building or erection of machinery.
- Legal expenses- capital expenditure when incurred in connection with the purchase of land or building.
- Freight- capital expenditure when incurred in respect of purchase of plant and machinery.
Whenever, therefore, a part of the expenditure, ostensibly of a revenue nature, is capitalised it is the duty of the auditor not only to examine the precise particulars of the expenditure but also the considerations on which it has been capitalised.
