capital and revenue

05/02/2009 Dr Sarbesh Mishra 1

Capital and RevenueCapital Income – The term “Capital Income” means an income which does not grow out or pertain to the running of the business proper.


Capital ProfitCost of the Building – 1,00,000/-

Selling Price of the Building – 1,50,000/-

Capital Profit = 50,000/-

Which implies profit realised over and above the cost of the fixed asset should be considered as Capital Profit.


Revenue ProfitExample:Cost Price of Plant = 1,00,000/-Book Price of Plant (After Depreciation)= 70,000/-Selling Price = 1,20,000/- Profit = 1,20,000 – 70,000 = 50,000/-So here Profit has two components namelyCapital Profit + Revenue Profit = 20,000 + 30,000


Revenue Profit“The profit realised over and above the

book value of the asset till it does not exceed the original cost of the asset should be taken as revenue profit”.


Revenue Income

“Revenue Income means an income which arises out of and in the course of regular business transactions of a concern”.


Example

The profit made on sale of goods, income received from letting out of business property, dividends received. All such incomes are revenue incomes.

From Accounting angle Revenue Profit & Revenue Income gets the same treatment.


Capital ExpenditureExpenditure expended for the purpose of obtaining long term advantage for the business.

Examples Expenditure incurred in increasing the quality

of fixed assets e.g. Purchase of additional furniture, Plant, Building for permanent use in Business.


Example (Contd.) Expenditure incurred for substitution of a new

asset for an existing asset. Expenditure incurred in connection with the

purchase, receipt, erection of a fixed asset e.g. erection charges of a new plant.

Expenditure incurred for acquiring the right of carrying on a business e.g. purchase of patent rights, copy rights, goodwill.


Revenue Expenditure“An expenditure that arises out of and in the course of regular business transactions of a concern is termed as revenue expenditure”.

Example

Expenditure incurred in the normal course of running the business e.g. expenses of administration, cost incurred in manufacturing & selling the products, repairs, Depreciation, Interest on loan.


Deferred Revenue Expenditure “It is a class of revenue expenditure which is

incurred during an accounting period, but is applicable either wholly or in part to future periods”.

Expenditure wholly paid for in advance, where no service yet been rendered, necessitating its being carried forward i.e. Telephone rental or office rent paid in advance etc.


Example Expenditure in respect of service rendered

which for any reason considered as an asset e.g. Development cost in Mines & Plantations, Debentures in limited companies and cost of experiments.

Amounts representing losses of an exceptional nature e.g. property confiscated in a foreign country, heavy loss of non-insured assets through fire.


Difference between Capital Expenditure & Revenue Expenditure Capital expenditure incurred either for

acquiring new fixed assets or for improving existing ones, while Revenue expenditure is incurred either for maintaining the existing fixed assets or for meeting the routine expenses of the business.


Contd………. Capital expenditure increases earning

capacity of the business while Revenue expenditure helps in maintaining the existing earning capacity of the business.

The benefit of Capital expenditure are available over a period of time, while the benefit of Revenue expenditure is restricted only to the accounting period in which it been incurred.


Revenue Expenditure becoming Capital Expenditure Repairs – Amount spent on repairs of

plant, furniture, buildings etc. is taken as Revenue Expenditure. But when some second hand plant or motor car is purchased, then expenditure incurred on some immediate repairs of such plants, motor car etc. to make it fit for use will be considered as capital expenditures.


Contd….. Wages – The amount spent on wages is

usually taken as a revenue expense. However, amount of wages paid for erection of new plant & machinery or wages paid to workmen engaged in construction of a fixed assets should be taken as a part of the cost of fixed asset.


Contd……… Legal Charges – Legal charges are always

considered as Revenue expenditure but Legal charges incurred in connection with purchase of fixed assets should be taken as a part of the cost of fixed asset.

Transport Charges – These are generally of revenue nature, but transport charges incurred for a new plant & machinery are taken as expenditure of a capital nature.


Revenue Loss Revenue Losses are those losses which arise

during the normal course of running the business because of fall in the value of Current Assets of the business.

N.B – Current assets consists of cash & other assets which get converted in to cash during the operating cycle of the firm e.g. Cash, Sundry Debtors (Accounts Receivable), Inventories (Stocks), Loans & Advances, Pre-paid expenses


Receipts Capital Receipts Revenue Receipts

“Capital Receipts consists of additional payments made to the business either by shareholders of the company or by the proprietors of the business or receipts from sale of fixed assets of a business”.


Revenue Receipts“Any receipt which is not a capital receipt is a

revenue receipt".

Most of the receipts are revenue receipts. Revenue receipt is different from revenue profit or revenue income. Receipt denotes receiving of payment in cash. The entire amount of receipt may or may not be a revenue income.


Example : Goods costing 20,000/- are sold for 25,000/- ,

there is a revenue receipt of 25,000/- but revenue profit

capital and revenue

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