Capital and Revenue(Receipts and Expenditure)

Objective Meaning and features of Capital and Revenue

expenditure.

Classify the expenditure into Capital and Revenue.

Meaning and features of Capital and Revenue Receipts.

Classify receipts into Capital and Revenue.

Deferred Revenue Expenditure

Capital and Revenue Expenditure The preparation of Trading Account, Profit and

Loss a/c and Balance Sheet requires the knowledge of:

Revenue expenditure,

Revenue receipts,

Capital expenditure and

Capital receipts.

Difference between ‘Expense’ and ‘Expenditure’

If utility of payment is availed during the same accounting period –Expense

If utility of payment is availed for more than one year –Expenditure

Receipts - the actual

amount of cash

received.

Capital Revenue

Revenue Receipts Receipts generated out of routine business

transactions

Earned by selling goods or services.

Available for meeting all day to day expenses of a business concern

Recurring in nature

E.g. Sales proceeds received Collection from debtors

Capital Receipts Do not arise due to normal course of business.

Non recurring in nature because not regularly earned by the business.

e.g. Receipts from sale of fixed Assets Receipts on account of raising of capital for

business Receipts on account of payments received

towards debentures or other loan

Basis of Difference

Capital Receipts Revenue Receipts

Source Do not arise during the normal course of business.

Arise during the normal course of business.

Nature Capital in nature and hence are not treated as items of income of the business.

Revenue in nature and hence are treated as items of income of the business.

Occurrence These are of non-recurring in nature.

These are recurring in nature.

Examples: Sale of fixed assets, and raising of loans

Sale of goods, rent from tenants, dividend received, etc.

Expenditure

Capital Revenue Deferred Revenue

Revenue Expenditure Benefit of it will be available only up to one

accounting year.

Doesn’t lead to enhancement of earning capacity of the business.

Incurred for regular business activities.

Recurring in nature

Part of Trading or Profit and Loss account.

Revenue Expenditure E.g.

Expenditure incurred on purchase of raw material.

Expenditure incurred on payment of wages, salaries, office expenses etc.

Expenditure incurred for the upkeep of an asset.

Capital Expenditure Incurred for getting the long term benefit.

Benefit not exhausted within one accounting year, available for number of year.

Incurred to enhance profit earning capacity of business.

Non recurring in nature.

Capital Expenditure E.g.

Expenditure incurred for construction, acquisition or purchase of fixed asset.

Expenditure for installation of fixed asset.

Expenditure incurred to acquire right to carry on the business.

Basis of Difference

Capital Expenditure Revenue Expenditure

Purpose Acquisition of fixed assets. Incurred for maintenance of fixed assets.

Earning Capacity It increases the earning capacity of business.

It helps in maintaining earning capacity of business.

Periodicity of benefit

Its benefits are spread over a number of years.

Its benefits accrue only in one accounting year.

Placement in financial statement.

Balance Sheet and shown as an item of asset.

Trading and P/L a/c and shown on debit side of either of the a/cs.

Occurrence of Expenditure

Non recurring in nature Recurring expenditure.

Example: Acquisition of fixed asset such as building, plant and machinery

Payment of Salaries, carriage etc

Deferred Revenue Expenditure Expenses incurred during one accounting year

but are applicable wholly or in part in future periods.

These expenditures are otherwise of a revenue nature.

Benefit is not confined to one accounting year - it extends to future accounting year or years also.

This expenditure does not result in the acquisition of any fixed asset.

E.g.

Expenditure incurred to the formation of a joint stock company i.e. Preliminary Expenses.

Expenditure on research and experiment connected with the introduction of a new product.

Heavy expenditure on advertisement for marketing a new product.

Expenditure on removal of business from one place to another place.

Whether expenditure is capital or revenue it depends upon its purpose and nature of business

Capital Profits and Losses:

Revenue Profits and Losses:

Difference between Revenue Expenditure and Capital

Expenditure Expenses incurred to

run the business in one accounting period and the benefit of which is consumed in same accounting period.

Recurring in nature

Expenses not fully consumed within an accounting period, or which increase the earning capacity or decrease the future costs.

Non recurring in nature.

Difference between Revenue Expenditure and Deferred

Revenue Expenditure Benefit of these

expenditure is exhausted in one accounting year.

Recurring expenditure.

Benefit of these expenditure is not exhausted in one accounting year.

Non recurring expenditure.