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CA CPT Accounts
Prof.CA.Rudramurthy.BVCA, M.COM, MFM, M-PHIL, PGDBA, PGDMM.
Revenue and Capital Expenditures:Revenue Expenditure relate to the
Operations of business or to the revenue earned during the period or the items of expenditure whose benefit does not exceed beyond the accounting period in which it was incurred.
Capital Expenditure generates enduring benefits and helps in revenue generation for more than one accounting period in which the expense was incurred.
Revenue and Capital Expenditures:The distinction between Revenue and
Capital Expenditures is done for the purpose of placing them in Profit and Loss a/c (If it is Revenue expense) or in the Balance Sheet (If it is Capital expense).
Even though Capital expenditures are written as Asset in the B/S, they are expensed over a period of time based on their utilisation in that accounting period. 3
Revenue and Capital Expenditures:Revenue expenses are transferred to
P/L a/c in the year of spending whereas Capital expenses are transferred in the year of utilisation of its benefit.
Thus both Capital and Revenue expenses are ultimately transferred to Profit and loss a/c.
Expenses are recognised in P/L a/c through matching concept, whereas revenues are matched with expenses to arrive at Profit or Loss. 4
How to Determine Revenue and Capital Expenditures???Based on Nature of business, for a
Furniture dealer, Purchase of Furniture is a Revenue expenditure and for any other dealer, it is a Capital expenditure.
Based on frequency of recurrence, Expenses which are frequently recurring are Revenue in nature (Ex: Rent, Salary etc) and those which are non-recurring are Capital in nature (Ex: Purchase of Fixed assets) 5
How to Determine Revenue and Capital Expenditures???Based on Purpose of Expense, repair expenses incurred in the ordinary course of business for maintenance of asset is a Revenue Expense and Expense incurred to increase the productive capacity of asset is a Capital expense.
How to Determine Revenue and Capital Expenditures???Based on the Year in which it affects the revenue generating capacity of business, expense which helps in generating revenue in the current period is a revenue expense and that which generates revenue over more than one accounting period is Capital expense.
How to Determine Revenue and Capital Expenditures???Based on the Materiality, expenses
whose relative proportion of amount involved is big is Capitalised or else it is Expensed (Revenue Expense). NOTE:Expenses on repairs of normal nature is a Revenue expense, however repairs on purchase of a second hand asset before its use is a Capital Expense.
Deferred Revenue Expenditures:It is a revenue expense incurred in one
accounting period itself but for the time being it is deferred from being charged completely against income.
It is deferred due to benefit from such expense being expected for more than one accounting period.
Ex: Heavy Advertisement Expenses, Preliminary Expenses, Heavy Repairs on improving the productive capacity of asset etc. 9
Deferred Revenue Expenditures:A thin line of difference exists
between Deferred Revenue expense and Prepaid expense, while the former expenses/ benefit cannot be precisely estimated over an exact period of time, the latter's is possible.
Ex: Advance Rent of 2months rent is prepaid expense, but heavy advertising expense may be deferred over a period of 4 to 5 years.
Revenue and Capital Receipts:Revenues which are obtained in the
course of normal business activity are called as Revenue Receipts.Ex: Sale of goods and services, Interest on Investments etc.
Capital receipts are receipts which are not obtained in the normal course of business. They are generally non-recurring in nature.Ex: Sale of fixed assets, loans borrowed etc. 11
Revenue and Capital Receipts:Revenue receipts are Credited to
P/L a/c whereas Capital receipts are not credited to P/L a/c. Only Profit or Loss arising on account of sale of assets are credited or debited to P/L a/c in the year of such sale.
However recognition of both Revenue and Capital receipts are on accrual basis.