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Question

What are the three circumstances under which an expenditure which is usually of a revenue nature may be taken as an expenditure of a capital nature?

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Solution

Following are some of the circumstances under which an expenditure which is usually of a revenue nature may be taken as an expenditure of a capital nature.
1. Repairs: Usually the expenditure on repairs of machinery, equipment, etc is taken as revenue expenditure but when the expenditure is incurred on an asset to make it fit for use or it increases the productive capacity of the asset it will be recorded as a capital expenditure. For eg- when a second-hand car is purchased, expenditure incurred to make it fit or future use will be considered as capital expenditure.
2. Wages: Normally the amount paid as wages is taken as revenue expenditure but wages paid in connection to work mean directly engaged in the construction of a fixed asset of for erection of a new machine should be taken as capital expenditure. For eg- when installation charges or labour wages are paid for installing a new fixed asset like machinery it is to be included under capital expenditure.
3. Raw Material and Stores: Raw Materials used in the production of goods are taken as revenue expenditure but when the same Raw Material is consumed in the construction of fixed assets should be treated as capital expenditure.

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