Introduction: Accounting is the recording and reporting of business transactions. Business transactions involve activities of actual Business (selling goods or services), Investment (purchasing assets) and Financing (raising money for investment). • Business activities give rise to revenue income and revenue expenditure. • Investment activities give rise to capital expenditure. • Financing activities give rise to capital receipts.
• Profit and loss is a summary of revenue income and revenue expenses.
• Balance sheet is summary of capital receipts and capital expenditure.
Capital Expenditure: •Expenditure means a payment made by a business to obtain some benefits I.e. assets, goods or services. • It means an expenditure carrying probable future benefits. The term is generally restricted to expenditures that add fixed asset units or that have the effect of increasing the capacity, efficiency, lifespan or economy of operation of an existing asset. Characteristics:
1. Long-term Benefits: Such expenditure has long term benefits. The benefits of capital expenditure can be enjoyed for a number of years. 2. Investing Activity: Capital expenditure helps to set up and develop a business. It create and increases the earning capacity of business. 3. Recoverable: Money spent on capital expenditure can be recovered through income generated by asset or even by selling the asset. 4. Non- recurring:
Capital expenditure is non-recurring in nature.i.e or need not be incurred again and again. 5. Effects on Funds and Profits: Capital expenditure decreases funds in the current year as the money goes out of business. 6. Disclosure in Final Account:
Capital expenditure is shown as Asset in Balance Sheet.
Examples: 1. Acquisition of a Fixed Asset: All expenses incurred on the asset till they capable of yielding income are capital expenses a) Purchase price, import duties, taxes, and any direct cost of bringing the asset to its working condition for it's intended use. b) Financing costs for acquisition of fixed asset for the period up to such acquisition.
c) Administration and other general overhead expenses are added to the cost of fixed asset they are related to the acquisition of that particular fixed asset. 2. Expenditure that improves the standard of performance of an existing asset: a) Extends the useful life of the asset .e.g. renewal of lease b) Expands the capacity of the asset e.g. expanding the seating capacity of a cinema hall c) Improves the efficiency of the asset e.g. installing faster processor j computer for speedy processing of data. d) Improves economy of operation
e) Improves productivity 3. Cost of an addition and extension to an existing asset. 4. Investments I.e. Shares, securities, bonds, debentures immovable property etc. 5. Cost of acquisition of an intangible assets e.g. goodwill, patents, copyrights license, etc. 6. Cost of acquiring and development of wasting asset like mine ,oil- well ,tea estate etc. is also capital expenditure. Revenue Expenditure: Revenue expenditure means an expenditure from which no future benefit is expected. While an expenditure on obtaining goods or services by a concern in the course of its business activity is known as revenue expenditure. Characteristics: 1. Business Activity:
Expenditure that pertains to business activity is recorded as revenue expenditure, as it helps to
run a business and earn income. E.g. Purchase of goods, fees, paid etc.
2. Maintain Asset: Expenditure that helps to maintain an asset in working condition is treated as revenue expenditure. For e.g. Repairs to asset. 3. Not Recoverable: Money spent on revenue expenditure is irretrievably gone. It cannot be recovered. Hence expired costs and revenue losses are as revenue expenditure. 4. Recurring: Revenue expenditure is recurring in nature. Same type of expenditure is to be incurred again and again on regular basis (e.g. purchase of goods, payment of rent etc.) 5. Reduces funds and profits:
Revenue expenditure reduces both funds and profits of the current year. As money goes out, the funds available with the concern are reduced, and as the money goes out irretrievably it reduces the profits of the concern.
Examples: 1. Costs relating to the business activities during the accounting year are treated as revenue expenditure: a) Cost of production (purchase of goods, wages, factory, expense, etc) b) Cost of administration (Salaries to staff, printing and stationary) c) Cost of selling and distribution d) Cost of finance 2. Costs relating to the income earned during the accounting year, for eg.interest paid on loans taken for investing in shares. 3. Costs whose benefits do not extend beyond the accounting year, for eg. Purchase of tools having useful life of 6 months. 4. Revenue losses, for e.g. Goods destroyed by fire, etc. 5. Revenue expenditure incurred after the plant has begun commercial production.
6. Expenditure of repairs 7. Expenditure on intangible item, expenditure o research is always ways considered as expense as it is recurring in nature. Deferred Revenue Expenditure: •It is that expenditure which is carried forward on the presumption that it will be benefit over subsequent period. It is also known as Deferred Expenditure. To defer means to postpone. • The item of expenditure having medium term benefits (say 3 months) are treated as deferred revenue expenditure. The proportion cost (1/3) related to current year is charged as expenses. The balance cost (2/3) is carried forward as fictitious asset in the balance sheet and written off in next years. Examples: • Share issue expense. • Discount on issue of share. • Debenture issue expenses.
• Discount on issue of debenture.
• Premium payable on redemption of debenture.
⮚ It is carried forward on the presumption that it will be benefit over subsequent period and is carried forward as fictitious asset in the balance sheet and written off in next years. Capital Receipts: Receipts mean an amount received by concern either during its business activity or during its financing activity. Capital Receipt means an amount received by concern in the course of its financing activity. The money is obtained either from the proprietor or loans or sale of asset or sale investments. Characteristics:
1. Financing Activity: Receipt which arises out of financing activity. It provides funds to acquire a new asset. For e.g. Funds received as capital, by way of loan for. Banks, from sale of assets, etc. 2. Returnable: Money received as capital or loan is returnable i.e. it has to be paid back. 3. Non- recurring It is non- recurring in nature.i.e such amounts are not received regularly or again and again. This concern does not take loan form bank every month. 4. Effects of funds and profits:
Capital receipts increases funds in the current year as the money comes into business. For eg. Acquiring of loan, Issue of Share, Issue of Debentures etc Examples: •Cash brought in the business by proprietor. •Loan received from bank. •Sale of old machinery.
•Sale of share held as investment.
•Grants received from government with reference to total investment in a concern for acquisition of assets. Revenue Receipts: Revenue receipts means the receipts from customers for sale of goods, for services given, or for use of funds or use of assets. Total revenue receipts are computed by adding up the sale price of goods sold, fees for services, interest on loans given, dividend on shares and royalty for use of patents, know-how, etc. Revenue receipts are recurring in nature income from sale of goods is received regularly so long as the business continues. Characteristics: 1) Business Activity: A receipt in the course of business activity is recorded as revenue receipt e.g. sale of goods, fees received etc. 2) Recurring:
Recurring receipt is recurring in nature. Same type of receipt is received again and again on regular basis. For eg.sale of goods, receipt of interest, etc
3) Not Returnable: Money received as revenue is not refundable. It needs not be paid back as the concern has supplied goods or services against the amount received. 4) Increase Funds and Profits: Revenue receipts increase both funds and profits of the current year. A money comes in, the funds available with the concern are increased, and as the money comes in irretrievably it increases the income and profits of the concern. Revenue Receipt VS. Capital Receipts
Revenue Receipt Capital Receipt
1. It pertain to business activity. It pertains to financing activity. 2.Examples are sale of goods, interest, 2.Examples are capital from owner, dividends, royalty, etc. received loans from bank, etc. 3. It pertains to current year shown as 3. Capital receipt is shown as income in P&L a/c; pertains to further liability in balance sheet. period shown as liability in balance sheet. 4. Need not be returned/ refundable. 4. May be returned back. 5. It is recurring in nature. 5. It is non-recurring in nature. 6. It increases profits and funds. 6. It increase funds available for investment, but may be reduced profits as well as interest to be paid on loans obtained. Revenue Expenditure VS Capital Expenditure
Revenue Expenditure Capital Expenditure
1. It pertains to business activity. 1. It pertains to financing activity. 2. It helps to run business. 2. It helps to set up and develop a business. 3. It helps to maintain asset. 3. It helps to acquire new asset. 4.Exampes are purchase of goods ,fees 4. Examples are fixed asset like paid , etc. machines, investment in shares. 5.It pertains to current year shown as 5. Capital expenditure is shown as expenses P&L a/c; pertains to further Asset in balance sheet. period shown as Asset in balance sheet. 6. Money on Revenue expenditure is 6. Money on capital expenditure irretrievably gone. It cannot be may come back on slow of asset or recoverable. investment. Illustrations:
Q.1.State whether the following expenditure is a capital or revenue expenditure. Give reason: 1. Cost of replacement of a defective part of the machine. 2. Expenditure incurred in preparing the project report. 3. Expenditure for training employees for better running of machinery. 4. Expenditure incurred in repairing the cinema screen.
Q.2. State with reason, whether you would consider the following as capital expenditure or revenue expenditure: 1. Amount spent on the uniform of workers. 2. Premium paid in connection with acquisition of leasehold premises. 3. Goods distributed as free samples amongst the workers on Diwali Puja day. 4. Custom duty on the machinery imported.
5. Fees paid for renewal of licence for factory.
Q.3 State with reason the accounting treatment for the following: 1. Wages paid for construction of the building extension. 2. Purchase 2000 Shares of 100 each.
3. White washing of the factory of building.
4. Amount spent on painting the new factory. 5. Import duty on raw material purchase.
Q.4. State with reasons whether the following items are capital or revenue: 1. Received from the issue of further shares. 2. Invested in government loan. 3. Payment of salaries. 4. Taxes paid. 5. Payment for purchases of stationary.
Q.5. State whether the following are capital or revenue. Give reason for the same:
1. Sale of old machinery.
2. Term loan taken from bank. 3. Commission Received on sales. 4. Brokerage paid on purchase of land. 5. Payment of a loan taken earlier Q.6 Classify with reason the following into capital or revenue: 1. Interest paid on bank overdraft. 2. Premium on issue of new share.
3. Dividend and interest on investment received.
4. Received Rs.2, 00,000 on issue of equity share capital and incurred Rs. 5,000 as share issue expenses 5. Legal expenses in connection with collection of debts.
Q.7.State with reason the nature of following Expenses/ Receipts:-
1. Sold Government securities for Rs.1, 40,000.
2. Received Rs.5, 00,000 on the issue of Debenture. 3. Rs.51, 000 received from an insurance company for suspension of business activities due to a bomb blast in the city. 4. Rs.6, 00,000 received from the issue of further shares. 5. Commission received on sale Rs.2000.
