Replacement of Fixed Assets

The above rules of capital and revenue expenditure do not hold good when an existing asset is
replaced for another. If an asset is replaced with a similar kind of asset, the expenditure incurred
is treated as Revenue Expenditure. For example, if a set of weighing machines in a shop
becomes defective and is replaced with a similar set, the cost of replacement should be treated
as revenue expenditure and it should be charged to the Profit and Loss Account. However, if
an asset is replaced with an asset which is superior than the previous one, the expense is partly
capital and partly revenue. For example, if a manual typewriter costing Rs 5,000 is replaced
with an electronic typewriter costing Rs 15,000, then Rs 5,000 will be revenue expenditure and
the excess value of the new typewriter over the old one, Rs 10,000 will be capital expenditure.