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Capital and Revenue

Capital Income – The term “Capital Income”


means an income which does not grow out or
pertain to the running of the business proper.

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Capital Profit
Cost of the Building – 1,00,000/-
Selling Price of the Building – 1,50,000/-
Capital Profit = 50,000/-

Which implies profit realised over and above


the cost of the fixed asset should be
considered as Capital Profit.
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Revenue Profit
Example:
Cost Price of Plant = 1,00,000/-
Book Price of Plant (After Depreciation)= 70,000/-
Selling Price = 1,20,000/-
Profit = 1,20,000 – 70,000 = 50,000/-
So here Profit has two components namely
Capital Profit + Revenue Profit = 20,000 + 30,000

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Revenue Profit
“The profit realised over and above the
book value of the asset till it does not
exceed the original cost of the asset
should be taken as revenue profit”.

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Revenue Income
“Revenue Income means an
income which arises out of
and in the course of regular
business transactions of a
concern”.

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Example
The profit made on sale of goods, income
received from letting out of business
property, dividends received. All such
incomes are revenue incomes.

From Accounting angle Revenue Profit &


Revenue Income gets the same treatment.
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Capital Expenditure
Expenditure expended for the purpose of
obtaining long term advantage for the
business.
Examples
 Expenditure incurred in increasing the quality
of fixed assets e.g. Purchase of additional
furniture, Plant, Building for permanent use in
Business.
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Example (Contd.)
 Expenditure incurred for substitution of a new
asset for an existing asset.
 Expenditure incurred in connection with the
purchase, receipt, erection of a fixed asset e.g.
erection charges of a new plant.
 Expenditure incurred for acquiring the right
of carrying on a business e.g. purchase of
patent rights, copy rights, goodwill.
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Revenue Expenditure
“An expenditure that arises out of and in the
course of regular business transactions of a
concern is termed as revenue expenditure”.
Example
Expenditure incurred in the normal course of
running the business e.g. expenses of
administration, cost incurred in manufacturing
& selling the products, repairs, Depreciation,
Interest on loan.
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Deferred Revenue Expenditure
“It is a class of revenue expenditure which is
incurred during an accounting period, but is
applicable either wholly or in part to future
periods”.

 Expenditure wholly paid for in advance,


where no service yet been rendered,
necessitating its being carried forward i.e.
Telephone rental or office rent paid in
advance etc.
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Example
 Expenditure in respect of service rendered
which for any reason considered as an asset
e.g. Development cost in Mines &
Plantations, Debentures in limited companies
and cost of experiments.
 Amounts representing losses of an
exceptional nature e.g. property confiscated in
a foreign country, heavy loss of non-insured
assets through fire.
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Difference between Capital
Expenditure & Revenue Expenditure
 Capital expenditure incurred either for
acquiring new fixed assets or for
improving existing ones, while Revenue
expenditure is incurred either for
maintaining the existing fixed assets or
for meeting the routine expenses of the
business.

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Contd……….
 Capital expenditure increases earning
capacity of the business while Revenue
expenditure helps in maintaining the existing
earning capacity of the business.

 The benefit of Capital expenditure are


available over a period of time, while the
benefit of Revenue expenditure is restricted
only to the accounting period in which it been
incurred.
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Revenue Expenditure becoming
Capital Expenditure
 Repairs – Amount spent on repairs of
plant, furniture, buildings etc. is taken as
Revenue Expenditure. But when some
second hand plant or motor car is
purchased, then expenditure incurred on
some immediate repairs of such plants,
motor car etc. to make it fit for use will
be considered as capital expenditures.
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Contd…..
 Wages – The amount spent on wages is
usually taken as a revenue expense.
However, amount of wages paid for
erection of new plant & machinery or
wages paid to workmen engaged in
construction of a fixed assets should be
taken as a part of the cost of fixed asset.
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Contd………
 Legal Charges – Legal charges are always
considered as Revenue expenditure but Legal
charges incurred in connection with purchase
of fixed assets should be taken as a part of the
cost of fixed asset.
 Transport Charges – These are generally of
revenue nature, but transport charges incurred
for a new plant & machinery are taken as
expenditure of a capital nature.
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Revenue Loss
 Revenue Losses are those losses which arise
during the normal course of running the
business because of fall in the value of
Current Assets of the business.

N.B – Current assets consists of cash & other assets


which get converted in to cash during the
operating cycle of the firm e.g. Cash, Sundry
Debtors (Accounts Receivable), Inventories
(Stocks), Loans & Advances, Pre-paid expenses

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Receipts
 Capital Receipts
 Revenue Receipts
“Capital Receipts consists of additional
payments made to the business either by
shareholders of the company or by the
proprietors of the business or receipts from
sale of fixed assets of a business”.

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Revenue Receipts
“Any receipt which is not a capital receipt is a
revenue receipt".
Most of the receipts are revenue receipts.
Revenue receipt is different from revenue
profit or revenue income. Receipt denotes
receiving of payment in cash. The entire
amount of receipt may or may not be a
revenue income.
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Example :
 Goods costing 20,000/- are sold for 25,000/- ,
there is a revenue receipt of 25,000/- but
revenue profit

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