Capital And Revenue
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Capital and Revenue Capital Income – The term “Capital Income” means an income which does not grow out or pertain to the running of the business proper.
05/02/2009
Dr Sarbesh Mishra
1
Capital Profit Cost 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. 05/02/2009
Dr Sarbesh Mishra
2
Revenue Profit Example: 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 namely Capital Profit + Revenue Profit = 20,000 + 30,000
05/02/2009
Dr Sarbesh Mishra
3
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”.
05/02/2009
Dr Sarbesh Mishra
4
Revenue Income “Revenue Income means an income which arises out of and in the course of regular business transactions of a concern”.
05/02/2009
Dr Sarbesh Mishra
5
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. 05/02/2009
Dr Sarbesh Mishra
6
Capital Expenditure Expenditure 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. 05/02/2009
Dr Sarbesh Mishra
7
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.
05/02/2009
Dr Sarbesh Mishra
8
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. 05/02/2009
Dr Sarbesh Mishra
9
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.
05/02/2009
Dr Sarbesh Mishra
10
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.
05/02/2009
Dr Sarbesh Mishra
11
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.
05/02/2009
Dr Sarbesh Mishra
12
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.
05/02/2009
Dr Sarbesh Mishra
13
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.
05/02/2009
Dr Sarbesh Mishra
14
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.
05/02/2009
Dr Sarbesh Mishra
15
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.
05/02/2009
Dr Sarbesh Mishra
16
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 05/02/2009
Dr Sarbesh Mishra
17
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”.
05/02/2009
Dr Sarbesh Mishra
18
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. 05/02/2009
Dr Sarbesh Mishra
19
Example :
Goods costing 20,000/- are sold for 25,000/- , there is a revenue receipt of 25,000/- but revenue profit
05/02/2009
Dr Sarbesh Mishra
20
05/02/2009
Dr Sarbesh Mishra
1
Capital Profit Cost 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. 05/02/2009
Dr Sarbesh Mishra
2
Revenue Profit Example: 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 namely Capital Profit + Revenue Profit = 20,000 + 30,000
05/02/2009
Dr Sarbesh Mishra
3
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”.
05/02/2009
Dr Sarbesh Mishra
4
Revenue Income “Revenue Income means an income which arises out of and in the course of regular business transactions of a concern”.
05/02/2009
Dr Sarbesh Mishra
5
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. 05/02/2009
Dr Sarbesh Mishra
6
Capital Expenditure Expenditure 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. 05/02/2009
Dr Sarbesh Mishra
7
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.
05/02/2009
Dr Sarbesh Mishra
8
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. 05/02/2009
Dr Sarbesh Mishra
9
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.
05/02/2009
Dr Sarbesh Mishra
10
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.
05/02/2009
Dr Sarbesh Mishra
11
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.
05/02/2009
Dr Sarbesh Mishra
12
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.
05/02/2009
Dr Sarbesh Mishra
13
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.
05/02/2009
Dr Sarbesh Mishra
14
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.
05/02/2009
Dr Sarbesh Mishra
15
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.
05/02/2009
Dr Sarbesh Mishra
16
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 05/02/2009
Dr Sarbesh Mishra
17
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”.
05/02/2009
Dr Sarbesh Mishra
18
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. 05/02/2009
Dr Sarbesh Mishra
19
Example :
Goods costing 20,000/- are sold for 25,000/- , there is a revenue receipt of 25,000/- but revenue profit
05/02/2009
Dr Sarbesh Mishra
20
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