CAPITAL & REVENUE

EXPENDITURE & RECEIPT

BY
PROF. ANITA SAHOO
 What is capital expenditure?

It is that expenditure the benefit of which is not fully consumed in

one period but spread over several periods. So it is long term in
nature.

It includes
Purchase of new plant
Additions to the building
Cost of removing the business to more spacious and better suited
premises
Brokerage and commission paid for procuring long term loans
Assets acquired for the purpose of earning and not for resale
Improving and extending fixed assets
Increasing the earning capacity of the business and raising capital for
the business
Such expenses appear in
the balance sheet.
 Some examples
Purchase of land, building, P&M, furniture, vehicles and
any other fixed asset
Cost of replacing a petrol driven engine to a diesel driven
engine
Expenditure incurred for increasing the sitting
accommodation in a cinema hall, restaurant.
Amount spend of erection of P&M.
Expenditure on Copyright, goodwill, trademark, Patent
Rights
Expenditure incurred on reconditioning an old fixed asset
Major repairs and replacement of any asset which results
in increased efficiency.
 What is revenue expenditure?
It consists of expenditure incurred in one period, the full benefit
of which is consumed in that period itself. It is short term in
nature.

It includes
Purchasing assets required for resale at profit or for being
converted into saleable goods or on raw materials.
Maintaing fixed assets in good working condition i.e. repaires
and renewals.
Meeting the day-to-day expenses for carrying out the business
activities
Cost of goods, RMs, stores, renewals, repairs, depreciation of
fixed assets, rent, wages, rates and taxes, salaries, carriage,
insurance etc.
Such items appear in the
Trading and Profit &
Loss Account.
 Distinction between Capital and Revenue
expenditure
CAPITAL EXPENDITURE REVENUE EXPENDITUTE
Results in acquisition of fixed assets No acquisition of fixed assets. This
which are meant for use and not expenditure is incurred to meet day-
resale. The asset acquired helps the to-day expenses.
business in earning profit and sold
only when they become obsolete

Results in improving the earning Results in maintenance of business

capacity of the fixed assets. Eg: assets such as repairs and
overhauling the machinery for maintenance of P&M.
improving its capacity

Represents the cost the benefit of Represents expired cost, i.e. the
which will be taken in the future. benefit which has already been taken
 CONTINUED…
CAPITAL EXPENDITURE REVENUE EXPENDITURE
Non-recurring expenditure Recurring expenditure
Benefit of such expenses will be for Benefit expires within one year and
more than 1 yr. The portion which is amount is charged to Trading or P&L
consumed is shown in P&L in terms of a/c for the same year.
depreciation.

All items of capital expenditure which
are not written off are shown in the
Balance Sheet as assets and are
carried forward to the next year
All items the benefit of which is
exhausted during the year are
transferred to Trading and Profit &
loss account. Such items are not
carried forward to the next year
because their benefit has been taken
in the concerned year.
 Revenue expenditure becoming Capital
expenditure

Repairs
Wages
Legal expenses
Transport expenses
Raw materials and stores
Carriage and freight
Advertising
Development expenditure
Preliminary or formation expenses
 Deferred revenue expenditure

It is that expenditure which would normally be treated

as revenue expenditure but it is not written off in one
period as its benefit is not completely exhausted in the
year in which it is incurred or is of a non-recurring and
special nature and is large in amount.

It may be spread over a number of years.

Proportionate amount may be charged in the P&L

Account and balance is carried forward to subsequent
years in the Balance Sheet.
 Some other important terms

Capital and Revenue Profit

Capital and Revenue Receipts

Capital and Revenue Losses

 Capital profits
Shares having original cost of Rs 4,000 are sold for
Rs 5000

Premium received on the issue of shares and

debentures

They are transferred to the Capital Reserve

appearing in the Balance Sheet Liabilities
side.
 Revenue Profit
Profit made by trading like profit on sale of
goods, income from investment, discount
received, commission received, rent
received, interest earned.

Such profits are taken to the credit side of

Profit and Loss Account.
 Capital Receipts

Capital invested in the business

Loans and proceeds of sale of the

assets

They are taken in the Balance Sheet.

 Revenue Receipts
Cash from sales
Discount received
Commission
Interest on investments

They are transferred to the P&L A/C

 Capital Losses
Occur on selling fixed assets, raising capital for eg
if investments having an original cost of Rs 20,000
are sold for Rs 16,000; there will be a capital loss
of Rs 4,000.

Capital Losses should not be debited to the P&L

Account but should be shown as an asset in the
Balance Sheet so that they can be set off as and
when profit arises.
 Revenue Losses
These arise during the normal course of
business i.e. in trading operations such as
loss on sale of goods.

They should be debited to P&L Account

THANKS