Difference Between Capital And Income Expenditures Essay

Difference Between Capital And Income Expenditures Essay

Length: 780 words (2.2 double-spaced pages)

Rating: Better Essays

Open Document

Essay Preview

The Tax Courts of Canada have developed three specific tests in distinguishing the difference between capital and income expenditures. With these tests that they use they also have specific considerations they assess in determining the expenditures are capital and the CRA also has specific criteria assisting them to determine the difference. Firstly, the three tests used consist of recurring expense test, Enduring benefit or asset test, and underlying purpose or rationale test (Ansari, 2016). The recurring expense test is a test used to determine whether there is a one time payment made or periodic payments made on an expenditure, just because an expense is made “once and for all”, does not mean it is capital in nature, Para 75 (Rio Tinto Alcan Inc v. The Queen, 2013). Recurring capital expenditures that provide a continual benefit to the business are purchasing new machines for the business, while current expenditures provides benefits that are used up in within one year such as severance payments (Rio Tinto Alcan Inc v. The Queen, 2013). The enduring benefit or asset test determines if the expenditure has a long lasting or surviving benefit, it should be treated as a capital expenditure, Para 76 (Rio Tinto Alcan Inc v. The Queen, 2013). The underlying purpose or rationale test determines if the expense is incurred relating to the income earning process then it is likely to be income, while expenses incurred as a part of the implementation of transactions results in an acquisition of a capital asset, or taxpayers’ business then it considered a capital expenditure, Para 77 (Rio Tinto Alcan Inc v. The Queen, 2013). The Tax Courts of Canada conducts these tests to determine if legal, investment banking, and other fees in respect of...


... middle of paper ...


...pital is income generated from investing and financing activities of a business whereas Income is generated from operating activities of a business. Capital is long term and lasts longer than one period or operating cycle and income is short term it is usually used up within one period or operating cycle. Capital is reflected in the balance sheet as an asset which includes property, plant, and equipment. Capital is not recurring, meaning that equipment need to be bought every year, it is bought once and maintained until its value diminishes to the residual value. Income is on the income statement and it is recurring meaning that it is calculated periodically or every year. Both Income and capital are needed for growth and survival of a business, a company cannot generate income without capital and capital cannot be bought without income (Accounting-Management, 2015).

Need Writing Help?

Get feedback on grammar, clarity, concision and logic instantly.

Check your paper »

Capital Expenditures Essay

- Capital Expenditures Capital expenditures have a significant impact on the financial performance of the firm; therefore, criteria for selecting projects must be evaluated with great care. Of the two corporations the firm is deciding to acquire, Corporation B is clearly the better investment as shown in Table 1 supported by the following data: net present value (NPV), internal rate of return (IRR), payback period, profitability index (PI), discounted payback period, and modified internal rate of return (MIRR) in addition to 5 year projections of income and cash flows....   [tags: Finances Financial Corporations Essays]

Better Essays
1056 words (3 pages)

Essay on Usefulness of The Statement of Cash Flows Versus The Income Statement

- USEFULNESS OF THE STATEMENT OF CASH FLOWS VS THE INCOME STATEMENT PART 1: A. A cash flow statement records the actual movement of a company’s cash, it shows where cash has come in from and what has actually been paid during the year. The cash flow statement records cash movements from three activities: operating, financing and investing. Operating activities adjusts the profit for non-cash expenses and gains and the changed in working capital and provides the cash actually received after conducting operations....   [tags: liquidity, capital, company, ]

Better Essays
1574 words (4.5 pages)

The Management Objectives : Driving The Hotel 's Income Generating Potential For Its Owners

- Guest Lecturer #4 - Colliers 1. The management objectives focus driving the hotel’s income generating potential for its owners. Vincent implied three key objectives Colliers set for potential opportunities; how many number of rooms (80+), what services do the building provide for and a high quality condition report. Consequently, they structure their quantitative analysis around occupany rates, room rates per night and ancillary services per room. Running Yeilds were important in stabilising cashflows over the investment horizon....   [tags: Investment, Rate of return, Risk]

Better Essays
1218 words (3.5 pages)

Capital Budgeting Is A Process That Analyzes And Ranks The Proposed Projects

- Capital Budgeting Capital budgeting is a process that analyzes and ranks the proposed projects in order to determine, which ones deserve investment. There are three general methods to decide which proposed projects deserve investment which are the, throughput analysis, discounted cash flows analysis, and payback analysis. Throughout analysis determines the impact of the investment and the throughput of the whole system. Discounted cash flow analysis utilizes the discount rate in order to determine the present value of all cash flows....   [tags: Net present value, Cash flow]

Better Essays
833 words (2.4 pages)

Essay on Australia 's Financial Performance And The Government 's Fiscal Policy

- The Australian Government Budget provides a picture of Australia 's forecast financial performance and the government 's fiscal policy for the forward years. The Budget includes estimates of government revenue and expenses for the Commonwealth over a specified period. It also lays out a plan for people on how their tax money will be spent and what they will have to pay and what will be cut from their spending. This year’s budget is aiming to cut tax from middle-income earners, which impacts the distribution of income and wealth in Australia....   [tags: Tax, Income tax, Income, Progressive tax]

Better Essays
1649 words (4.7 pages)

Marketing Plan For A Fine Foods Essay

- Slide 8 Kudler Fine Foods was started by a women, owner Kathy Kudler, who had a passion for cooking and a love for shopping for unique and creative culinary options. Kudler’s entire business plan focuses on the consumer, their needs and their wants, as well as what will provide them with the best customer service available in the San Diego, Metropolitan area. Kudler is constantly receiving new products, offers catering services and online options for shopping, as well as a staff that is educated about the products sold at Kudler Fine Foods locations....   [tags: Income statement, Revenue]

Better Essays
1379 words (3.9 pages)

How GDP Per Capita Influences Education Expenditures Essay

- GDP per capita Among different factors that have influenced education expenditure, GDP per capita is the key indicator. The government sets the annual budget based on the level of GDP per capita, therefore low levels of GDP per capita result in a higher budget deficit empowered to boost the economy. For instance, (Strawczynski & Zeira, 2003) implied that education spending has risen significantly due to the population growth and increase in per capita income, when conducting a study for Israel for 1962-1998....   [tags: income, inemployment, spending]

Better Essays
2475 words (7.1 pages)

Capital Budgeting And Capital Expenditure Essay

- Capital budgeting or capital expenditures or investment is paramount in any practice. It is the chief determinant of a successful practice. A well-crafted capital budgeting decisions are central to the financial security of a firm. It is one of the crucial decisions that will be made by the owners of any practice. The acquisition of assets such as land, equipment, and buildings is included in capital budgeting and entails financial burdens to the practice. As a result, adequate planning of the budget to avoid financial hardship is very advantageous (Prather, 2009)....   [tags: Revenue, Income statement]

Better Essays
1413 words (4 pages)

Essay on The US & Global Economic Trades

- The US & Global Economic Trades Change is a constant. The ability to change at a rate greater than or equal to that constant helps separate successful companies and countries (Kotter, 2012). The US and South Korea serve as examples of countries that have underwent transformational changes the last 50 years. While the US continues to become more specialty oriented, South Korea has completely reinvented itself from the depths of economic futility ("South korea’s education," 2013). While the US GDP has slowed, it remains a highly sought after trade partner (in part due to consumption and economic well-being)....   [tags: GDP, human capital, trade deficit]

Better Essays
1100 words (3.1 pages)

Essay on Differences On The Income Statement

- Differences on the Income Statement Extraordinary Items: One difference of using IFRS and GAAP on the Income Statement is the use of extraordinary items. Under the IFRS rules the use of extraordinary items are prohibited. GAAP rules however allow the use of extraordinary items. Extraordinary items are caused by a gain or loss of an event that is unusual and infrequent. Some examples of extraordinary events are natural disasters or lawsuits. Extraordinary events are not likely to happen again anytime soon....   [tags: Balance sheet, Income statement]

Better Essays
765 words (2.2 pages)