Capital and revenue concept

Business transactions can be classified into

a) Transactions of capital nature
b) Transactions of revenue nature
 Items of revenue nature are shown in the income statement and items of capital
in the balance sheet.
 So it is essential to identify the nature of items otherwise income statement does
not show the real profit and balance sheet fails to show a true and fair picture of
financial position.
 Distinction between capital and revenue items is also essential for income tax
purpose because income tax is charged on income, not in capital.
 In many cases it is difficult to make a distinction between capital and revenue.
 There is no hard and fast rule for it. Capital items at one time may be the revenue
at another time.
 However, the following are the basis used to classify capital and revenue items.
1. Objectives: Capital expenditure is made for increasing earning capacity but
revenue expenditures is concerned with maintaining current earning capacity.
2. Time period: Capital items are concerned for long period where as revenue items
are for short term in nature.
3. Nature: Capital items are non- recurring in nature but revenue items are recurring
in nature.
4. Amount: Amount of capital items are huge in compared to revenue items
5. Classification: Capital items are classified as assets, liabilities & capital but
revenue items are classified as income, expenses, profit & loss.

Classification of capital & revenue items:

a. Capital & revenue expenditure
b. Capital & revenue profit
c. Capital & revenue loss
d. Capital & revenue reserve

a) Capital & revenue expenditures: Capital expenditures are made when a firm
spends money to either buy fixed assets or add to the value of existing assets.
Such type of expenditure is not fully consumed in one period but spread over
several years. It includes the following items:
 Acquiring fixed assets
 Carriage inwards on fixed assets
  Installation & transportation costs
 Heavy expenditures on research & development etc.
Revenue expenditures: The expenditures for running business on day to day basis are
known as revenue expenditures. The benefits of revenue expenditures are enjoyed
within one accounting period. Such expenditures are incurred to operate the business.
Example of revenue expenditures are as follows:
 Wages, salaries, rent, insurance etc.
 Interest on loans
 Depreciation on fixed assets
 Cost of goods bought for resale
 Taxes & legal expenses etc.
Differences
Capital expenditures Revenue expenditures
1 It is incurred to acquire fixed assets 1 It is incurred to operate the day to
day business
2 Benefits for a long time 2 Benefits for one year
3 It helps to increase the earning capacity 3 It helps to earn existing revenue
of the firm
4 It is taken to assets side of balance 4 It is charges to P/L a/c every year
sheet
5 5 It has no physical existence
It has physical existence except
6 intangible assets 6 It is recurring & regular
7 It is non recurring & irregular 7 It is not transferable
It is transferable

b) Capital & revenue receipts

Capital receipts: Money received in the form of capital is called capital receipts.
It includes capita invested in the business, loan taken, sale of fixed assets, issue of
shares and debentures etc.

Revenue receipts: Money received in the ordinary course of business is called

revenue receipts. It includes cash from sale, discount received, commission received,
interest received etc.

Differences
Capital receipts Revenue receipts
1 It is received in the form of capital 1 It is an income
2 It is shown in liabilities side of B/S 2 It is shown in credit side of trading
& profit & loss a/c
3 Amount received occasionally i.e. it is 3 Amount received daily i.e. it is
 non recurring recurring
4 It increases both assets & liabilities 4 It increases profit & assets

c) Capital profit and revenue profit

Capital profit: Capital profit refers to the profit earned on transactions relating to the
capital nature. It is earned as a result of selling fixed assets, issuing shares &
debentures, valuation of assets etc.

Revenue profit: Revenue profit refers to the profit that is earned in the ordinary
course of business. It is also called operating profit. It includes profit from sale of
goods, discount received, interest received, bad debt recovered etc.

Differences:
Capital profit Revenue profit
1. It generates from capital receipts 1. It generates from revenue receipts
2. It is not distributed in the form 2. It is distributed in the form of
dividend dividend
3. It is non-recurring in nature 3. It is recurring in nature
4. It is shown in balance sheet as capital 4. It is shown in credit side of profit &
reserve loss a/c

d) Capital loss and revenue loss

Capital loss: The losses that incur on capital items is called capital loss. Loss on sale of
fixed assets & investment, shares & debentures issued at discount, premium on
redemption of debentures are the example of capital loss.

Revenue loss: The loss which arises during the normal course of business activities is
known as revenue loss.

Differences
Capital profit
1. It results from capital items
2. It is non-recurring in nature
3. It is shown either in assets side of
B/S or adjusted on capital profit
Revenue profit
1. It results from revenue items
2. It is recurring in nature
3. It is shown in debit side of profit &
4. loss a/c and adjusted in retained
earning in B/S
e) Capital & revenue reserve:
A reserve which is created out of revenue profit is called revenue reserve
whereas any reserve which is created out of capital profit is called capital
reserve.
From book (Page no.230 old addition)