CAPITAL AND REVENUE: ILLUSTRATION 4

A company wants to extend its business and in order to raise more capital issues more shares. The advertising expenditure incurred for sale of these shares will be treated as capital expenditure.

5. PRINCIPLE OF EARNING CAPACITY

Another test that helps in differentiating between capital and revenue

expenditure is whether the earning capacity of the organization has increased due to this expenditure or not. If an expenditure results in increasing the earning capacity Dfa Ho of the business, it will be treated as capital expenditure. On the other hand, if the expenditure is incurred for maintaining the earning capacity, it is a revenue expenditure.