Class-11-theory-Book-Chapter-20-CAPITAL-AND-REVENUE-1

LILHA EDUCATION CENTRE
CHAPTER-20
CAPITAL AND REVENUE
(Classification of Expenditure and Classification of Receipts)

(A) Capital Expenditure and Revenue Expenditure:
Capital Expenditure:- Any expenditure which is incurred in acquiring or increasing the value of
a fixed asset is termed as capital expenditure. As such, the amount spent on the purchase of Land
and Building, Plant and Machinery, Furniture etc. is capital expenditure. Such expenditure yields
benefit over a long period and hence is written in Assets. Following are the examples of capital
expenditure:-
I. Expenditure which results in the acquisition of a fixed asset such as land, building, plant,
motor vehicles, trade marks, etc. Such asset would be used in the business for a number
of years.
II. Expenditure in 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,
overhauling of second-hand machines etc.
Revenue Expenditure Any expenditure, the benefit of which is received during the current year
itself is termed as revenue expenditure. As such, all the revenue expenditures are debited to
Trading and Profit & Loss Account. Such expenditure does not result in an increase in the
earning capacity of the business but only helps in maintaining the existing earning capacity.
Examples are :
i. Expenses incurred for the purpose of day to day running of business such as
manufacturing expenses, office expenses, selling expenses etc.
ii. Expenses incurred on the ordinary repairs and maintenance of fixed assets, white-
washing of building etc.
iii. Payment for goods purchased for resale.
iv. Depreciation on fixed assets.
v. Purchase of raw materials for converting it into finished goods.
vi. Interest on loan and interest on capital for the period after the asset is put to use.
vii. Replacement of worn-out part of an existing machine.
viii. Loss from sale of fixed assets.
Distinction between Capital Expenditure and Revenue Expenditure:

Basis of Distinction Capital Expenditure Revenue Expenditure
1. Purpose It is incurred for the It is incurred for the day-to-
acquisition or erection of a day running of the business.
fixed asset for use in business.
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2. Earning capacity It increases the earning It is incurred for maintaining

capacity of the business. the earning capacity.
3. Period Its benefit extends to more Its benefit is exhausted within
than one year. maximum period of one year
4. Accounting It is debited to related Asset It is debited to related
Treatment Account. Expenses Account.
5. Nature of Account It is a real account. It is a nominal account.
6. Presentation It is shown in the Balance It is shown in the Trading or
Sheet. Profit and Loss Account.
7. Examples Purchase of fixed assets like Rent, salaries, repairs,
plant and machinery, land and depreciation etc.
building, furniture etc.
“Revenue Expense relates to the operations of the business of an accounting period or to the
revenue earned during the period or the items of expenditure, benefits of which do not extend
beyond that period. capital Expenditure, on the other hand, generates enduring benefits and helps
in revenue generation over more than one Accounting period.”
“Capital expenditure contributes to the revenue earning capacity of a business over more than
one accounting period whereas revenue expense is incurred to generate revenue for a particular
accounting period. The revenue expenses either occur in direct relation with the revenue or in
relation with accounting periods.”
“Deferred revenue expenditure is that expenditure for which payment has been made or a
liability incurred but which is carried forward on the presumption that it will be of benefit over a
subsequent period or periods. Deferred revenue expenditure should be revenue expenditure by
nature in the first instance. But its matching with revenue may be deferred considering the
benefits to be accrued in future.”
“Receipts which are obtained in course of normal business activities are revenue receipts (e.g.
receipts from sale of goods or services, interest income etc.) Revenue and capital receipts are
recognised on accrual basis as soon as the right of receipt is established. Revenue receipts should
not be equated with the actual cash receipts. Revenue receipts are credited to the Profit and Loss
Account.”
Capital Receipts and 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.
Capital Receipts:
Examples of capital receipts are:
(i) Amount received from the sale of fixed assetsor investments.
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(ii) Capital contributed by proprietors, partners or money obtained from issue ofshares and
debentures in case of company.
(iii) Amount received by way of loans.
Revenue Receipts:
(1) Money obtained from sale of goods.
(2) Commission and fees received for services rendered.
(3) Interest and dividend received on investments.
SHORT ANSWER QUESTIONS
1.What is Capital Expenditure? Give six examples of Capital Expenditure.
2. Explain Revenue Expenditure with examples.
3. Give three points of distinction between Capital Receipt and Revenue Receipts.
LONG ANSWER QUESTIONS

1. State the meaning of capital expenditure and revenue expenditure. What is the difference
between them?
2. “Capital expenditure is different from Revenue Expenditure.’’ Explain by giving suitable
examples.
3. Distinguish between: -
(i) Capital Expenditure and Revenue Expenditure
(ii) Capital Receipt and Revenue Receipts
4. (i) Classify the following as capital expenditure, revenue expenditure and deferred revenue
expenditure for a cloth merchant?
(a) Preliminary Expenses
(b) Purchase of Furniture
(c) Payment of Salary
(d) Expenses paid for constructions of building.
Ans. (i) (a) Preliminary Expenses: Deferred Revenue Expenditure;
(b) Purchase of Furniture: Capital Expenditure;
(c) Payment of Salary: Revenue Expenditure;
(d) Expenses paid for constructions of building: Capital Expenditure.
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LILHA EDUCATION CENTRE

(Classification of Expenditure and Classification of Receipts)

Distinction between Capital Expenditure and Revenue Expenditure:

2. Earning capacity It increases the earning It is incurred for maintaining

LONG ANSWER QUESTIONS

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