Class 11 Accountancy

Chapter - 19
Capital &
Revenue
 A. Capital Expenditure & Revenue Expenditure
 Any expenditure which is incurred in acquiring or increasing the value
of a fixed asset is termed as capital expenditure.
Capital  As such, the amount spent on the purchase of Land and Building, Plant
& Machinery, Furniture etc. is capital expenditure.
Expenditure  Such expenditure yields benefit over a
long period and hence is written in Assets.

Following are the examples of Capital Expenditure

1) Expenditure which results in the acquisition of a fixed asset such as land,
building, plant, motor vehicles, trade marks, etc.
2) Expenditure on connection with the purchase or erection of a fixed asset such as wages paid to workers for
erecting machines, cartage paid on acquiring plant and machinery, over-hauling of second-hand machines etc.
3) All amount spent upto the point an asset is put to use is treated as capital expenditure.
4) Expenditure incurred for establishing the business, e.g., the cost of a patent, preliminary expenses, goodwill etc.
5) Interest on capital upto the point production is ready to commence or during the period of formation of
company.
6) Expenditure incurred on the purchase of second-hand asset and on putting such asset into working condition.
  Any expenditure, the benefit of which is received during the
current year itself is termed as revenue expenditure. As such, all
Revenue the revenue expenditures are debited to Trading and Profit &
Loss Account.
Expenditure  Such expenditure does not result in an increase in the earning
capacity of the business but only helps in maintaining the
existing earning capacity.

Following are the examples of Revenue Expenditure

1) Expenses incurred for the purpose of day to day running of business such as manufacturing expenses, office
expenses, selling expenses etc.
2) Expenses incurred on the ordinary repairs and maintenance of fixed assets, white-washing of building etc.
3) Payment for goods purchased for resale.
4) Depreciation on fixed assets.
5) Purchase of raw materials for converting it into finished goods.
6) Interest on loan and interest on capital for the period after the
asset is put to use.
7) Replacement of worn-out part of an existing machine.
8) Loss from sale of fixed assets.
Distinction between Capital Expenditure & Revenue Expenditure

Basis of Distinction Capital Expenditure Revenue Expenditure

1) Purpose It is incurred for the acquisition or It is incurred for the day-to-day
erection of a fixed asset for use in running of the business.
business.
2) Earning Capacity It increases the earning capacity of It is incurred for maintaining the
business. earning capacity
3) Period Its benefit extends to more than Its benefit is exhausted within a
one year. maximum period of one year.
4) Accounting It is debited to related Asset It is debited to related Expenses.
Treatment Account.
5) Nature of Account It is real account. It is a nominal account.
6) Presentation It is shown in the Balance Sheet. It is shown in the Trading or
Profit and Loss Account.
7) Examples Purchase of fixed assets like plant Rent, salaries, repairs,
and machinery, land and building, depreciation etc.
furniture etc.
 B. Capital Receipts & Revenue Receipts
 It is also necessary to make a proper distinction between capital
receipts and revenue receipts because the revenue receipts are
shown on the credit side of Trading and Profit & Loss Account
whereas the capital receipts are shown in the Balance Sheet either
as increase in liabilities or as reduction in the value of the assets.

Examples of capital receipts are :

Capital a) Amount received from the sale of fixed assets or investments.
b) Capital contributed by proprietors, partners or money obtained
Receipts from issue of shares and debentures in case of company.
c) Amount received by way of loans.

It refers to those receipts which arise in the normal course of business.

They are recurring in nature, such as
Revenue a) Money obtained from sale of goods.
Receipts b) Commission and fees received for services rendered.
c) Interest and dividend received on investments.
 Deferred Revenue Expenditure

There are certain expenditures

which are revenue in nature but
the benefit of which is likely to
be derived over a number of
years. Such expenditures are
termed as ‘Deferred Revenue
Expenditures’.