Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Standard view
Full view
of .
Save to My Library
Look up keyword
Like this
0 of .
Results for:
No results containing your search query
P. 1
Capital & Revenue

Capital & Revenue

Ratings: (0)|Views: 11,206|Likes:
Published by Dr Sarbesh Mishra
To understand meaning and concept of capital and revenue items with illustrated examples.
To understand meaning and concept of capital and revenue items with illustrated examples.

More info:

Categories:Business/Law, Finance
Published by: Dr Sarbesh Mishra on Aug 21, 2009
Copyright:Attribution Non-commercial


Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less





Final Account (Capital and Revenue)
Learning Objectives
To understand the meaning of capital expenditure
To understand the meaning of revenue expenditure
Capital Expenditure
1.Capital expenditure is that expenditure the benefits of which are not fully consumedin a year but spread over several years.2.It is the expenditure which results in the purchase or acquisition of asset or property.3.It is the expenditure incurred in connection with the purchase of asset.4.It is the expenditure incurred to bring an old asset into working condition.5.It is the expenditure incurred for extending or improving an existing asset to increaseits productivity or to increase the earning capacity of business or to decrease workingexpenditure.It can be said that the capital expenditure benefits not only in the current accounting year  but also many years in the future. The expenditure is generally non-recurring and theamount spent is normally large. However, it should be noted that not every bigexpenditure is capital expenditure. Capital expenditures are shown in balance sheet.
Revenue Expenditure
1.Revenue expenditure is the expenditure which benefits in the current accountingyear. It is not carried forward to the next year or years.2.It is the expenditure which is incurred in the normal course of business to run the business and to maintain the fixed assets of business.3.It is the expenditure which is incurred on purchase of goods meant for resale or to purchase materials which will be used to convert them into final product.Therefore, revenue expenditure is a recurring expenditure made to maintain the business.The amount spent is generally small and the benefit is for a short period which is notmore than a year. All revenue expenditure are charged to trading and profit and lossaccount.
Deferred Revenue Expenditure
Deferred revenue expenditure is the expenditure which is originally revenue in nature butthe amount spent is so large that the benefit is received for not a year but for many years.A proportionate amount is charged to profit and loss account of each year and balance iscarried forward to subsequent years as deferred revenue expenditure. It is shown as anasset in the balance sheet, e.g., heavy expenditure incurred on advertisements.
Capital Receipts
Capital receipts are the receipts which are not received in the ordinary course of  business. These are non-recurring receipts. Money obtained from the sale of fixed assetsor investments, issue of shares or debentures, loans taken are some of the examples of capital receipts. Capital receipts are shown as liability reduced from assets appearing inthe balance sheet.
Revenue Receipts
Revenue receipts are receipts obtained in the normal course of business. It is a receiptagainst supply of goods or services. The money obtained from sales, interest, dividend,transfer fees etc. are examples of revenue receipts. Revenue receipts are credited to profitand loss account.
Capital Profit
Those profits which are not earned during the regular course of business and which arenot earned on account of the day-to-day trading activities of the business are capital profits. For example, profit on sale of asset and premium received on issue of shares.These types of profits are normally not taken to profit and loss account but are shown inthe liabilities side of the balance sheet.
Capital Losses
The losses which are not suffered during the regular course of business are called capitallosses. For example, discount on issue of shares.
Problem 1
1. An old machinery is purchased for Rs. 1,00,000 and Rs. 25,000 has been spent to bring it in working condition.Answer-- Both the above expenses are capital expenditures as Rs. 1,00,000 has beenspent to acquire the asset and Rs. 25,000 has been spent to make the machinery productive. The machinery will now be used for many years and its cost is Rs.1,25,000.2. A building is purchased for Rs. 10,00,000 and Rs. 1,00,000 has been spent asexpenses like brokerage, stamp duty, registration charges and on other legalexpenses.Answer-- Both the above expenditures are capital expenditures as Rs. 10,00,000 has been spent for the purchase of asset and Rs. 1,00,000 for all the incidental expensesfor buying the asset. The cost of the building is now Rs. 11,00,000.3.Repairs to building Answer-- It is revenue expenditure because it is incurred for maintaining the building. Both the reason for repairs and the amount are notimportant.
4.Amount spent for the replacement of defective and worn out parts of an old plantAnswer-- It is revenue expenditure as it is incurred to keep the plant in normalworking condition. No new asset comes into existence.5. Heavy expenditure incurred on advertisements.Answer-- Normally, advertisement is revenue expenditure. But, as heavy expenditureis incurred, it will be treated as deferred revenue expenditure. The benefits of it will be received for many years. Proportionate amount will be written off every year bydebiting profit and loss account and the remaining amount will be shown in the balance sheet on the asset side.
Problem 2
1. A machinery costing Rs. 5,00,000 is imported on which freight and insurance of Rs.7,000, custom duty of Rs. 13,000, clearing charges of Rs. 5,000 and installationcharges of Rs. 10,000 were incurred.Answer-- Rs. 5,00,000 spent on the purchase of asset and Rs. 35,000 spent on other incidental expenses should be considered as capital expenditure until the machinerycomes in working condition. The cost of machinery will be Rs. 5,35,000.2. New equipment for existing machinery were bought for Rs. 30,000 to increase the production by 25%Answer-- The above expenditure is capital expenditure as it increases the productioncapacity and thereby increases the earning capacity of the business. It is a non-recurring expense and should be added to the value of asset.3.Taxes paid Answer-- It is revenue expenditure as it is a regular expense of the business. It is a recurring expense. The benefit is only for one year.4.Expenditure for repainting the factory shed Answer-- As repainting is a normalexpenditure made for maintenance of the factory, it is revenue expenditure. It is arecurring expense and no new asset comes into existence.5.Traveling expenses of directors for a trip abroad for purchasing imported machineryAnswer-- As the traveling expenses is incidental expenditure to purchase machinery,it should be treated as capital expenditure and should be added to the cost of machinery. In this case, if directors purchase the machinery, it would be deferredrevenue expenditure and would be written off over a reasonable period of say 3 to 5years.

Activity (24)

You've already reviewed this. Edit your review.
1 hundred reads
1 thousand reads
kheytz_901649906 liked this
Loraine Unipa liked this
Ng Nick liked this
Atif Mehmood liked this
Anakshi Dhama liked this
Gauri Kavlekar liked this
Pranali Shinde liked this
Sanjay Bhola liked this

You're Reading a Free Preview

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->