Capital And Revenue Expenditure
Capital expenditure represents an asset or a liability and is reflected in the balance sheet and all revenue expenditures which are incurred to get revenue income are taken to the profit and loss account.
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Capital expenditure represents an asset or a liability and is reflected in the balance sheet. Under this category comes those expenditure which are incurred for the following purposes :
Purchase of building, land, plant and machinery, furniture and fitting and vehicles that are called fixed assets. The assets that are purchased should be done with the intention of using them for business purpose and not with the intention of making profit through resale.
All expenditure incurred on the particular asset to prepare it for using in the enterprise forms the cost of the fixed asset. Capital expenditure also includes extensions and additions on the fixed asset purchased such as additions to buildings, plant, machinery since it contributes to enhancing productivity during future use.
It also includes expenses that would reduce production cost, administrative costs and distribution costs such as expense of shifting business premises, compensation to retrenched employee, etc.
Items listed under capital expenditure are given below :
Goodwill, freehold land and building, legal charges, lease, expenses incurred on machineries, plants, tools, fixtures, etc. The expenses incurred on trademarks, patents, copyrights, designs are also examples of capital expenditure. Expenses incurred on erection of plant and machinery also comes under capital expenditure.
All the expenses are treated as revenue expenditures if it is incurred for the following purposes : Expenditure made on the purchase of assets meant for resale at a profit or for being converted into saleable goods, such as the cost of goods, raw materials and stores.
Apart from this all those expenses which are incurred on the maintenance of assets in proper working order e.g., repairs to plant and machinery, building furniture and fittings etc. also comes under revenue expenditure. Even day to day recurring expenses also comes under revenue expenditure for example expenses of carrying on a business e.g., salaries, rent, rates, taxes, stationery, postage, etc.
All revenue expenditures which are incurred to get revenue income are taken to the profit and loss account.The following is a list of the usual items of revenue expenditures :
- All Expenses which are incurred for the ordinary administration and carrying on the business.
- All the Expenses incurred on the repairs, renewals and replacement of permanent assets.
- All the cost of goods for resale is treated as revenue expenditure.
- All the Cost of raw materials and stores acquired for use in the production process.
- All the wages paid for production of goods for sale.
- All the expenses which are incurred on the production and distribution of the final product.
- All the Loss arising from normal wear and tear and obsolescence of assets.
- All the Depreciation of lease.
- Any type of Interest on loans borrowed for the purpose of business.
- Any type of loss arising from sale of fixed assets.
- Any type of Fees paid for renewal of patent rights, etc.
- Any type of expenses incurred on the vehicle.
- Any expenses incurred on the fan and lights etc.
- Any loss arising due to assets discarded or totally damaged or destroyed by fire or other reasons.
Deferred Revenue Expenditure
When a large sum of revenue expenditure is incurred in any particular year, the benefit of such expenditure may carry on to several years; such expenditure is called ‘Deferred Revenue’ Expenditure. The utilized portion of expenditure is charged to Profit and Loss Account and the balance is carried forward and are written off in future accounting periods and shown in assets side of the Balance Sheet of the current year.
Following are the main characteristics of deferred revenue expenditure :
- Such expenses are of revenue nature
- These expenses are relatively of very large amount
- The benefit of such expenses is extended beyond the accounting year or several accounting year.
Deferred Revenue Expenditure is comprises of the following
Expenditures wholly paid in advance: These are the expenses which are usually paid in advance in full during the accounting year. Expenditures partly paid in advance: such expenses include insurance premium which is payable partly for the current year and partly for the next year.
The expired period expenditure is charged to profit & loss A/c and the unexpired portion is taken into the side of balance sheet that has assets column.
Abnormal Losses : Loss incurred due to uninsured risk such as loss due to fire, loss in transit due to accident or confiscation of property in a foreign country. Such losses are spread over two to three years. This amount is written off and is charged to profit and loss account and balance is shown to assets side of the balance sheet.
A receipt is the inflow of money into the business which indicates the money received by a business enterprise. A receipt of money is considered as capital receipt when a contribution is made by the proprietor, partners or shareholders towards the capital of the business or a contribution of capital by someone outside the business.
As such capital receipt creates a liability for the business. Capital receipts do not have any effect on profit or losses of the business enterprise. Capital receipts can take one or more of the following forms : Additional capital introduced by the proprietor or partners or shareholders by issuing fresh shares.
When a loan or a mortgage on property is arranged. By selling assets, previously not intended for resale.
A receipt of money is considered as revenue receipt when it is received from customers for goods supplied, or fees received for services rendered in the ordinary course of business, which is result of the firm’s activity in the current period. Revenue receipts increases the profits and reduce the losses of the firm and as such credited to trading, profit & loss account or income statement.
Examples of Revenue Receipts :
- Sale proceeds of goods in which the firm deals.
- Discount received.
- Commission received.
- Interest received.
- Dividend received on investment.
- Subscriptions received.
- Rent received etc.
Capital and Revenue Profits
There is a lot of difference between the capital and revenue profit. Capital profit is the profit gained due to sale of a fixed asset. For example a building which was earlier purchased for Rs. 2, 20,000 is sold for Rs.3,25,000 the profit Rs.1,05,000 thus made is capital profit.
Revenue profit is a profit made by its normal business activities e.g., profit made through sale of goods, income from investments, commission earned, etc. Capital profit earned should be transferred to the capital account of the proprietor or credited to capital reserve account and this appears as a earned profit on the balance sheet.
Capital profit is never transferred in the profit and loss account as this contains items that are earned as revenue profit. Whenever there is a transaction of revenue profit is done only receipts and payments are entered in the P&L account and under no circumstances are capital profit transactions are entered.
Capital and Revenue Losses
Capital loss is opposite of capital profit. It is a loss arising due to sale of fixed asset or loss due to raising funds for business purpose. It is better to write off capital loss in the balance sheet instead of even showing it as liability since the asset is fictitious.
Revenue loss is loss occurred in normal business operations such as loss incurred while selling goods. Unlike capital loss revenue losses are charged to profit and loss account of the year in which they occur.