Para 3.16.23 — MSO (Audit)
Original Rule Text
3.16.23 When it has been decided that expenditure on a scheme for the creation of a new or additional asset shall be classed as capital, the following are the main principles applicable to the treatment of the expenditure in the accounts:
(i) Capital bears all charges for the first construction of a project as well as charges for intermediate maintenance of the work while not yet opened for service and bears also charges for such further additions and
improvements as may be sanctioned under rules made by competent authority.
(ii) Subject to
(iii) below, revenue bears all subsequent charges for maintenance and all working expenses. These embrace all expenditure on the working and upkeep of the project and also on such renewals and replacements and such additions, improvements or extensions as under rules made by competent authority are to be debited to the Revenue Account.
(iii) In the case of works relating to renewal and improvements, which partake both of capital and revenue nature, it is impracticable to draw a hard and fast line between what is to be properly debited to capital or to revenue. Allocation in such cases is made by detailed rules and formulae devised by the Executive authorities, which are applied in estimates and accounts to determine the allocation of expenditure between capital and revenue. These rules and formulae must necessarily be based upon some general principle of sound finance, which should aim at an equitable distribution of burdens between present and future generations.
Note: Where a Depreciation or Renewals Reserve Fund is established under special orders of Government for renewing assets of any commercial department or undertaking, the distribution of expenditure on such renewals and replacement between the Capital account and the Fund should be so regulated as to guard against over-capitalisation on the one hand and excessive withdrawals from the Fund on the other.
What This Means
Once expenditure on creating a new asset is classified as capital, three main principles govern how costs are treated in accounts. Capital bears all initial construction charges plus maintenance during construction and sanctioned additions. After the project opens for service, revenue bears all running costs and routine renewals. For mixed renewal-and-improvement works, detailed allocation rules divide the cost between capital and revenue to fairly distribute the burden between present and future generations.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Key Points
- 1Capital bears all first-construction costs including intermediate maintenance before the project opens
- 2Revenue bears all subsequent maintenance, working expenses, and routine renewals after opening
- 3Mixed capital-revenue works are split using detailed allocation rules and formulae
- 4The allocation principle aims at equitable distribution between present and future generations
- 5Depreciation or Renewals Reserve Funds guard against over-capitalisation and excessive fund withdrawals
Practical Example
A new railway line is under construction for three years. During construction, all costs including track maintenance, security, and sanctioned design improvements are charged to the capital account. Once the line opens for service, routine maintenance like rail replacement and signalling upkeep is charged to revenue. When a major bridge on the line needs widening (part renewal, part improvement), the engineering department applies the prescribed allocation formula to split the cost between capital and revenue accounts.
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.
Frequently Asked Questions
Why is maintenance during construction charged to capital?▼
What is a Depreciation Reserve Fund in this context?▼
This explanation was generated with AI assistance for educational purposes. Always refer to the official gazette notification for authoritative text.