Accounts - Capital & Revenue Expenditure

Omtex – Classes CAPITAL & REVENUE EXPENDITURE Omtex – Classes An expenditure is decided capital or revenue depending up on a factors such as:1. Benefits of an expenditure:- An expenditure whose benefit expires in one accounting period it self is charged as revenue. The expenditure whose benefit is received for more than one accounting period is called as capital expenditure. 2. Effect on revenue earning capacity:- An expenditure in the form of repairs of an already existing fixed assets which does not increase efficiency of the asset is regarded as revenue expenditure. For e.g. expenses of white wash of a factory building are revenue in nature. 3. Recurring ness of an expenditure: This is one of the most common test to decide whether the expenditure is capital or revenue in nature. Recurring ness refers to frequency with which a transaction occurs in a business. A recurring expenditure is one which occurs frequently, for example, payment of salary, rent, telephone charges etc. A non-recurring expenditure is one which by its nature infrequent for example, purchase of machinery. I.

Capital expenditure: Capital expenditure is that expenditure in which the benefit of the expenditure is enjoyed or consumed not in one year but over many years. For example: purchase of plant and machinery, land & building etc… These assets are used over a period of years. Such capital expenditure is shown in the balance sheet. i. Purchase of assets for business for earning profit with their use, but goods purchased for resale or consumption is not a capital expenditure but revenue expenditure. ii. Expenditure incurred for the purpose of putting into working condition of an old asset bought. iii. Expenditure incurred on improvement of an asset, to produce more or to improve its revenue earning capacity. iv. Expenditure incurred for putting a new assets to use. v. Expenditure incurred on an asset for increasing the revenue earning capacity of it. i.e. improving the production of income from the assets or increasing the life of an asset. vi. Expenditure incurred in raising capital required for earning profits. vii. Expenditure incurred acquiring the right to carry business. II. Revenue expenditure: Any expenditure which is not a capital expenditure and which is incurred for carrying the day to day business activities is called revenue expenditure. The benefit of such expenditure is for a short period. In any case it will not exceed to one year. It is not spread over the years to come. The value of the expenditure is comparatively small. It includes such items as, replacements, repairs, renewals, depreciation of fixed assets, discounts, raw materials, wages, salaries, power etc. These are charged to profit or loss account to ascertain the profit or loss from the business. Omtex – Classes

CAPITAL & REVENUE EXPENDITURE Omtex – Classes

III. Deferred Revenue Expenditure: All expenditure incurred for carrying on the normal business activity is known as revenue expenditure. The benefit of such expenditure is enjoyed in the year in which it is incurred. But sometimes, heavy revenue expenditure may be incurred in one year but the fruits or benefit of it may arise or occur not in one year only but in the following two or more years. These are of a “Queasy capital nature”. Consider Advertising. Normal annual advertising expenditure is written off to the profit or loss account annually. a. Heavy expenditure for launching a new product. b. Expenditure for issue or raising loan or capital. c. Expenditure for formation or registration. Capital expenditure Revenue expenditure 1. It is incurred for acquiring fixed as- 1. It is incurred for acquiring or producsets intended for use in business. ing goods for sale. 2. It is intended to extend or improve 2. It is intended to maintain the fixed the fixed assets. assets in a good working condition. 3. It increases revenue earning capacity3. It does not increase revenue earning of a concern. capacity of a concern. 4. Benefit of this expenditure extends 4. It intends to benefit current periods for more than one year. only. 5. It is not a loss to a concern. 5. It is a loss to a concern. 6. It is shown in balance sheet. 6. It is shown in Revenue account. Capital Receipts: Capital receipts are those receipts which do not recurred. They are of an unusual in nature and not arising through normal activities of the business. For example, amount received on account of issue of fresh share capital, Debentures, amount of loans raised, proceeds on sale of fixed assets, Deposits, premium on shares and debentures etc. Revenue Receipts: Revenue receipts are those items of income which are received or occurred in the ordinary course of business. For example, cash received on account of sales, discount received, commission received, interest and dividend on investments, transfer fees etc. Revenue receipts are credited to profit or loss account where as the Capital receipts will affect the balance sheet. PROBLEMS. I. Classify them into capital, revenue or deferred revenue expenditure 1. Legal expenses incurred in connection with issue of equity share of the company. 2. Cost of replacement of a defective part of the machinery. 3. Expenditure incurred in preparing a project report. 4. Expenditure for training employees for better running of the machinery. 5. Purchase of a machinery for sale. 6. Daily wages paid to an office peon. 7. Payment for purchase of goods. 8. Payment for purchase of stationery. 9. Payment for purchase of a car. Omtex – Classes CAPITAL & REVENUE EXPENDITURE Omtex – Classes 10. Payment for heavy in augural expenses. 11. Partial refund of capital to a partner. 12. Payment of a loan taken earlier.

13. Payment of salaries. 14. Wages for erection of machinery. 15. Professional fees paid in connection with acquisition of a leasehold premises. 16. Cost of registration and documentation of a newly company. 17. Compensation paid to a retrenched employees for loss of employment. 18. Expenditure incurred on purchase of cloth for uniform of employees. 19. Payment of import duty on purchases of raw materials. 20. Stock of Rs. 25,000/-was destroyed by fire of which Rs. 15,000/- was received from the insurance company. 21. The concern spent Rs. 1,00,000/- on heavy advertisement campaign to introduce a new product in the market. 22. Cost of dismantling a plant from a particular locality & reinstalling the same in another locality. 23. Cost of transporting newly purchased furniture. 24. Amount spent by a factory in overhauling its plant which was enhanced the life of the plant by five years. 25. Traveling expenses for a trip abroad for purchase of capital goods. 26. Amount spent on replacement defective parts of an old plant. 27. Bank loan repaid. 28. Debentures issued. 30. Grant receives from government for purchase of computer. 31. Salary grant received by Omtex classes from Maharashtra Government. 32. Interest received on loans. 33. Brokerage paid in connection with issue of debenture repayable after 6 years. 34. Old machinery sold. 35. Introduces capital into the business. 36. Profit on sale of investment. 37. Goods destroyed by fire. 38. Repairs to furniture. 39. Expenditure incurred in over hauling machinery. 40. Taxed paid. 41. Wages paid to the workers for erection of a new machinery. 42. Amount brought by the proprietor as capital.