CAPITAL AND REVENUE EXPENDITURE

CAPITAL AND REVENUE EXPENDITURE

 CAPITAL EXPENDITURE

Expenditure which is incurred for acquisition and extension or Improvement of fixed assets which would give benefit for more than one accounting year is called capital expenditure. Capital expenditure are non-recurring in nature.

In the Other words: Capital expenditure consist of those expenditures, the benefit of which is carried over to several accounting periods. For example amount spent on Purchase of plant and machinery, Building, Land, Furniture, Computer, Motor Vehicle, Patents etc.

Read: Concept of Goodwill

Capital expenditure is an expenditure which is incurred-  

  1. Expenditure incurred for acquisition of fixed assets such as plant and machinery, Building, Land, Furniture, Computer, Motor Vehicle, Patent etc.
  2. Expenditure for the extension or Improvement of Fixed assets.
  3. Expenses incurred for installation of fixed assets like wages paid for installing a plant.
  4. Expenses incurred for remodeling and reconditioning an existing asset like remodeling a building.
  5. Whose benefit is derived by the business for more than a years.
  6. These expenditure are non-recurring in nature.

CHARACTERISTICS OF CAPITAL EXPENDITURE

  1. Capital expenditure is a fixed nature.
  2. The benefit of capital expenditure to accrue over a long period of time.
  3. It is non-recurring in nature. 
  4. Incurred to increase the operational efficiency of the business concern. 
  5. Capital expenditures are recorded on the assets side of the Balance sheet. 
  6. The basic object of capital expenditure is to increase the earning capacity of the business enterprise.
  7. Capital expenditure is debited to concern assets account.

EXAMPLES OF CAPITAL EXPENDITURE

  1. Expenses incurred in the acquisition of Land, Building, Machinery, Furniture, Car, Goodwill, Copyright, Trade Mark, Patent Right, etc.
  2. Expenses incurred for increasing the seating accommodation in a cinema hall.
  3. Expenses incurred for installation of fixed assets like wages paid for installing a plant.
  4. Expenses incurred for remodelling and reconditioning an existing asset like remodeling a building.
  5. Cost of tools.
  6. Electric fitting expenses.
  7. Legal expenses paid for the purchase of fixed assets.
  8. Expenses for development of Trade Mark.
  9. Registration charges for the purchase of Land and Building.

REVENUE EXPENDITURE

Revenue expenditures consist of those expenditures, which are incurred in the normal course of business. They are incurred in order to maintain the existing earning capacity of the business. It helps in the upkeep of fixed assets. Generally it is recurring in nature.

       In the other words-The recurring and routine nature expenditures which are incurred for operating the business smoothly and which help to maintain business’s earning capacity, are called Revenue expenditure e.g. expenses incurred for producing finished goods such as direct expenses, purchase of raw material and other expenses as rent, salary, repairs etc.

CHARACTERISTICS OF REVENUE EXPENDITURE

  1. It helps in maintaining the earning capacity of the business concern.
  2. It is recurring in nature.
  3. These expenses are shown on the Debit side of the income statement (trading and profit and loss account).
  4. The benefit of these expenses to accrueshort period of time.
  5. These expenses are related to the general operation of the business.
  6. The increase in these expenses reduces the profit of the business.

Also Read: Adjustment entries: Adjustment entry

      EXAMPLES OF REVENUE EXPENDITURE

  1. Cost of goods purchased for resale.
  2. Office and administrative expenses.
  3. Selling and distribution expenses.
  4. Depreciation of fixed assets, interest on borrowings etc.
  5. Repairs, renewals, etc.
  6. Maintenance expenses of assets.
  7. Carriage of purchase.
  8. Carriage on sales.
  9. Rent tax and Insurance.
  10. Printing and stationery.
  11. General Expenses.

DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE

BASIS OF DIFFERENCE CAPITAL EXPENDITURE

 

REVENUE

EXPENDITURE

 

Meaning Capital expenditure consist of those expenditures, the benefit of which is carried over to several accounting periods. For example amount spent on Purchase of plant and machinery, Building, Land, Furniture, Computer, Motor Vehicle, Patent etc. The recurring and routine nature expenditures which are incurred for operating the business smoothly and which help to maintain business’s earning capacity, are called Revenue expenditure
Nature It is non-recurring in nature.

 

It is recurring in nature.

 

Period The benefit of capital expenditure to accrue over a long period of time.

 

The benefit of revenue expenses to accrue short period of time.

 

Amount The amount spent on capital expenditure is large. The amount spent on revenue expenditure is small.
Profit The increase in these expenses increase the profit of the business.

 

The increase in these expenses reduces the profit of the business.

 

Accounting in final account

 

Shown on the assets side of the balance sheet. Debit side of the trading and profit and loss account.

DEFERRED REVENUE EXPENDITURE

The expenditure which is revenue in nature, but the heavy amount spent and benefit likely to be derived over a number of years called deferred revenue expenditure.

A heavy revenue expenditure, the benefit of which may be extended over a number of years, and not for          the current year alone is called deferred revenue expenditure. For example, a new firm may advertise

very heavily in the beginning to capture a position in the market. The benefit of this advertisement

campaign will last for quite a few years. It will be better to write off the expenditure in three or four years and not only in the first year.

       CHARACTERISTICS DEFERRED REVENUE EXPENDITURE

  1. Benefit is enjoyed for more than one year.
  2. It is non-recurring in nature.

    EXAMPLES OF REVENUE EXPENDITURE

  1. Expenses incurred on research and development
  2. Abnormal loss arising out of fire or lightning (in case the asset has not been insured).
  3.  Huge amount spent on advertisement.

CAPITAL RECEIPT

Capital receipt is one which is invested in the business for a long period. It includes long term loans obtained from others and any amount realised on sale of fixed assets. It is generally non-recurring in nature.

In the other words- Capital receipts are those irregular receipts that don’t affect profit or loss of business; it either increases the liabilities (raising of loan) or reduces the fixed assets (by sale of fixed assets), so it will be shown in balance sheet.

       CHARACTERISTICS OF CAPITAL RECEIPT

  1. Amount is not received in the normal course of business.
  2. It is non-recurring in nature.

  EXAMPLES OF CAPITAL RECEIPT

  1. Capital introduced by the owner
  2. Borrowed loans
  3. Sale of fixed asset

REVENUE RECEIPT

Revenue receipt is the receipt of income which is earned during the normal course of business. It is

recurring in nature. These receipts increases profit and shown in the credit side of the Trading and Profit and Loss account.

       CHARACTERISTICS OF REVENUE RECEIPT

  1. It is received in the normal course of business.
  2. It is recurring in nature.

      EXAMPLES OF REVENUE RECEIPT

  1. Sale of goods or services.
  2. Commission received.
  3. Discount received.
  4. Dividend  received on shares.
  5. Interest received on investments etc.

CAPITAL PROFIT AND REVENUE PROFIT

In order to find out the correct profit and the true financial position, there must be a clear distinction                 between capital profit and revenue profit.

       CAPITAL PROFITS

Capital profit is the profit which arises not from the normal course of the business.

EXAMPLES OF CAPITAL PROFITS

  1.  Profit on sale of fixed asset.
  2.  Profit on sale of Investment.
  3.  Profit on Purchase of Business.
  4. Profit on forfeiture of shares.

       REVENUE PROFITS

Revenue profit is the profit which arises from the normal course of the business. i.e, Net Profit – the               excess of revenue receipts over revenue expenditures.

       CAPITAL LOSS AND REVENUE LOSS

In order to ascertain the loss incurred by a firm it is important to distinguish between capital losses and revenue losses.

       CAPITAL LOSSES

Capital losses are the losses that arise not from the normal course of business.

EXAMPLES OF CAPITAL LOSSES

  1.  Loss on sale of a fixed asset.
  2.  Loss on sale of Investment.
  3.  Loss on sale of Business.
  4. Loss on issue of share and debentures.

        REVENUE LOSSES

Revenue losses are the losses that arise from the normal course of the business. Loss on purchase and sale of goods.

In other words, ‘net loss’ – i.e., excess of revenue expenditures over revenue receipts.

EXAMPLES OF REVENUE  LOSSES

  1.  Loss on sale of Goods.
  2.  Bad debts are written off.
  3.  Discount Allowed.
  4. Loss of Goods by fire.
  5. Loss of Goods by theft.

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