Capital and Rev

8/9/2019 Capital and Rev

1/21

CA

PITALANDRE

VENUE


2/21

ImportanceofDistinguishingbe

tweencapitaland

rev

enueitems

Itisimportanttodisting

uishbetween

capitalandrevenue

itemsbecausethereven

ueitemsarec

onsideredinthe

preparatio

nofprofitandlossaccountandcapitalit

ems

becomepartofthebalancesheetofthebusiness

enterprise.

Determinationofthene

tprofitornet

incomerequiresthe

matchingconcepttobe

applied.

Asperm

atchingconcep

t,theexpenses(revenueexpend

iture)

needto

bematchedwithrevenue(Reve

nueIncome),

irrespectiveofwhetherthepaymenthas

beenmadeornotor

incomehasbeenreceive

dornot.

Toascerta

inprofits,rev

enueexpensesarededucted

from

revenuere

ceipts.


3/21

C

apitaland

Revenue

Receipts

CapitalR

eceiptscompriseofpaymentsorcontrib

utions

intotheb

usinessbythe

proprietor,partnersor

sharehold

erstowardsthecapitalofthefirmandan

ysums

receivedfromdebentur

eholders,any

loansandthe

proceeds

ofsaleofany

fixedassetsa

ndlongterm

investments.

Revenue

Receiptsori

ncomearetheoutcomeoffirms

activityin

theaccountingperiod;mo

neyreceivedonsale

ofgoodsintradeoron

renderingofservices.

Eg.

Sales,commission

andfeesreceived,

interest/dividendoninv

estments


4/21


5/21

Classificationofincome

Capital

income

Revenu

eincome


6/21

CapitalProfits/Capit

alIncome

Capitalin

comeisanincomewhic

hdoesnotrelateto

operation

softhebusinessorwhic

hdoesnotgrowout

oforperta

intotherunn

ingofthebus

inessproper.

Examples:Sharepremium,saleofa

fixedassetfora

valuemor

ethanthatforwhichitwas

purchased.eg

.

Capitalga

inofRs150,000ariseswhenbuildingbo

ught

forRs.200,0

00issoldforRs.350,00

0.

Note:Only

theprofitrealisedoverandabovethecostofthefixed

assetshould

betakenascap

italprofit(trans

ferredtocapitalreserve)

whiletheprofitrealisedoverandabovebookvalueofthea

ssettill

itdoesnotexceedtheoriginalcostfotheassetshouldbetakenas

revenuero

fitcreditedtoP

rofitandLossA

ccount

Capitalpr

ofitsareprofitsearnedonaccountof

saleof

fixedassetsorinconnectionwithsharecapital


7/21

Rev

enueProf

its/Reven

ueincome

Revenue

incomeisan

incomewhicharisesoutofandin

thecours

eofregularoperationsofthebusinessco

ncern

EgProfitmadeonsaleofgoods,incomer

eceivedfromlettingout

ofthebusinessproperty,d

ividendsreceivedonbusiness

investments,etc.

Revenuep

rofitsappearin

theProfitandL

ossAccount

Revenuep

rofitandrevenu

eincomearesy

nonymous.

Revenueprofitsarethoseearnedin

theordinary

courseof

business


8/21

Exp

enditure

Expenditurerefers

toapaymentorspending

ora

promisetomake

futurepaym

entforben

efits

receiv

edi.e.forass

etsorservices.


9/21

C

lassificati

onofExpenditure

C

apitalExpe

nditure

R

evenueExp

enditure

D

eferredRevenueExpen

diture


10/21

Capita

lExpendi

ture

Suchexpenditureiseitherincurredforacquisitionofa

fixedasset(tangibleorintangible)o

ronpermane

nt

improvementoradditionorsubstitu

tionorextens

ionto

anasset

toincreasetheearningcapacityofthebu

siness

enterprise

Capital

Expenditur

eisanyexpenditurewhich

isincur

redforthep

urposeoflo

ngterm

advantage.


11/21

Capita

lExpenditure

Definition:

Expenditureincurredinpurchasin

gorconstructing

propertywhichisintendedtoassistintheprodu

ction

ofprofitorinperma

nentlyimproving,enlargingor

extend

ingexistingp

ropertyinord

ertoincrease

its

profitearningcapacity.

Thedirectbenefitofsuchan

expenditurewillextendoverseveraltradingperiods

anditreplacescashbypermanent

asset.

(Rowland,

S.M.

inPrinciplesofAccounting)


12/21

Guidelinestodete

rminethat

expenditureis

capitalexpenditur

e:

Ifexpen

ditureisforthepurposeof

increasingprofit

eitherpositivelybyin

creasingearningcapacityo

r

negativelybydecreas

ingworkinge

xpenditure(d

ayto

dayexp

enses)

Ifwheth

erincreasing

theearningcapacityornot,

it

produce

sanassetcom

parativelype

rmanentinna

ture.


13/21

ExamplesofCapitalEx

penditure

Purchaseofpermanenttangibleassetsuchaspla

nt

andmac

hinery,office

equipment,furniture

Allsumsspentupto

thepointan

assetisready

for

useincludingexpendi

tureonitspurchase,receiptor

erection

eg.cartagechargespaidtobringthem

achinerytofactory,

installationcharges,

feespaidtolawyerfor

drawinglandpurchasedeed,

overha

ulingexpensesofsecond-handmachinery,


14/21

ExamplesofCapitalEx

penditure

Financin

gcostforafixedasset(i.e.

interestpaidon

loanstopurchaseafixedasset)fortheperioduptothe

timethe

assetisputtouse.

Suchin

terestisaddedto

thecostoffixedasset.

Theamo

untspenton

existingassetforthepurposeof

itsimprovementorextensionwhic

hwillraisethe

outputo

rreducethe

costofprodu

ction

Moneyp

aidforgoodw

ill

Moneyspenttoreduce

workingexpenses

eg.

Conversionofhand

-drivenmachinerytopower-dri

ven

machin

ery.


15/21

Revenu

eExpenditure

Itisan

expenditure

onconsumableitems,o

n

servicesandongoo

dsacquired

forresale.

Theseare

expenseswhosebenefitexpireswithin

theyearo

fexpenditur

eandwhich

areincurredto

maintaintheearningc

apacityofe

xistingassets.


16/21

Revenu

eExpenditure

Revenueitemsgenerally

include:

Thecostofmaterialsusedinmanuf

acturinggood

s

intended

forresale.

Wagesp

aidinconnectionwiththeproductionof

goods

meantfo

rsale.

Sellinga

nddistributio

nexpenses.

Allexpe

nsesincidentaltotheworkingofthebusiness

suchasdepreciation,rent,salaries,interest,etc.

Allexpe

nsesincurred

formaintainingtheefficien

cyof

fixedassetsbymeans

ofrepairs,rep

lacement,ren

ewals

andinsu

rance.


17/21

Principlesfordeterminingthenatureof

exp

enditure

1.

Expenditureinthe

acquisitionofanincomeearninga

sset-capital

expend

iture

intheprocessofearningoftheprofits-revenue

expend

iture.

2.

Expenditureisdeemed

tobecapitalwhenitismadefor

theinitiationofabusin

ess,forextensionofabusinessor

forasubstantialreplacementofequipment.

3.

Expenditureiscapitalwhenitismad

enotonlyon

ceand

forallbu

twithaviewtobringingintoexistenceanasset

oranadv

antageforthe

enduringben

efit.

4.

Whether

theexpenditureincurredwaspartofthefixed

capitalof

thebusinessorpartofitsc

irculatingcap

ital


18/21

Distinction

betweenCa

pitalandRevenueExpe

nditure

Shownin

Tradingandprofit&

lossA/c

Isanitemofbalancesheet

Itisconsumedwithinan

accountingyeari.e.ben

efits

onlyone

year.

Thusentireamountisch

argedto

incomestatement.Doesn

ot

appearinthebalancesheet.

Itproducesbenefitoverseveral

years.

Thusasmall

partischarged

to

incomestatem

entasdepreciation

andtherestappearsinthe

balancesheet

Itisusuallyarecurringitem

Itisnormally

anon-recurrin

g

outlay.

Maintain

stheearningca

pacity

Increasesear

ningcapacity

Isaroutineexpenditure

incurred

inthenormalcourseofbusiness

andincludescostofsales

and

maintenanceoffixedassets.

Incurredinac

quiringor

improvingpermanentassetsnot

meantforresale.Mayaddtovalue

ofanexisting

asset

Revenue

Expenditure

CapitalExpe

nditure


19/21

1.

Wages:wagesonerection

ofplant&mac

hineryorconstruction

2.

Rawmate

rialandstoresu

sedinconstructionoffixedasse

t

3.

Transport

charges:incurre

dfornewplant

&machinery

4.

Interestoncapital:Interes

toncapitalespe

ciallywherethe

natureof

businessrequiresconstruc

tionworkforalongperiod,

beforethe

commencementofthepro

duction.

5.

Legalexpenses:Legalexpensesincurredtoacquiretheas

sets

6.

Repairs:R

epairsonpurch

asesofsecond-handassettoputinto

workablecondition

7.

Advertisin

g:Thecostofs

pecialadvertisin

gcampaignfor

the

purposeofintroducingnewproducts.

8.

Developm

entexpenditure:Thedevelopmentexpenditureincurredon

rubberpla

ntations,horticu

lture,coalmine

s,etc.

Certainexpendituresusuallyrevenueinnature

aretreatedascapital

expendituress

incetheyleadto

theestablishmentofbusinessa

ndits

efficientrunninginthefollowingcircumstances:

RevenueExpenditure

becomingC

apitalExpe

nditure


20/21

DeferredRe

venueExp

enditure

ForExam

ple:Heavyad

vertisingexpenditureincurredin

introducin

ganewlineordevelopinga

newmarket,Costof

issuingsha

resanddebentu

res,Costofexperiments,

discou

nton

debentures

,Preliminaryex

penses

Deferredre

venueexpen

dituresareexpendituresw

hich

arebasicallyinthenatu

reofrevenueexpenditure

but

whosebenefitcoversanumberofye

arsi.e.their

benefitmayextendoveranumberofyears.


21/21

Distinctionbetwe

enCapitalE

xpenditurea

nd

DeferredRevenueExp

enditure

1.

Natureo

fexpenditure

-deferredrevenueexpenditureisa

revenue

innaturebut

isspreadoveranumberofyears

because

itisincurred

foraperiodm

orethanone

accountingyear.

2.

Yearsofbenefit:The

deferredrevenueexpenditu

re

benefits

lessernumberofyearsincomparisonto

capital

expenditure.

Deferredrevenueexpenditure-for3-5

years

Capita

lexpenditure-fo

r10-15years

3.

Recover

y:Deferredrevenueexpenditureonceincurred

cannotb

erecoveredb

ackgenerally.

Whilecapita

l

expenditureiscapableofbeingreconvertedintocash

thoughataloss.

Documents

Capital and Rev