Financial Accounting Capital and Revenue – tryspring

By | March 24, 2019

Financial Accounting – Capital and Revenue

One of the major aspects of preparing a correct financial
statement is to distinguish revenue and capital in regard to
revenue income, revenue expenditure, revenue payments, revenue
profits, and revenue losses of the company with capital income,
capital receipts, capital profit, or capital losses.

In fact, without differentiating, we cannot think of correctness
of a financial statement. Ultimately, it will mislead the end
results where no one can conclude anything. As per this
principle, a revenue item should be recorded in the Trading and
Profit & Loss account and a capital item should be recorded
in the Balance-Sheet of respective firm.

Capital Expenditure

Capital expenditure is the expenditure incurred to acquire fixed
assets, capital leases, office equipment, computer equipment,
software development, purchase of tangible and intangible assets,
and such kind of any value addition in business with the purpose
to enhance the income. However, to decide nature of the capital
expenditure, we need to pay attention on −

  • The expenditure, which benefit cannot be consumed or utilized
    in the same accounting period, should be treated as
    capital expenditure.

  • Expenditure incurred to acquire Fixed Assets for the company.

  • Expenditure incurred to acquire fixed assets, erection and
    installation charges, transportation of assets charges, and
    travelling expenses directly relates to the purchase fixed
    assets, are covered under capital expenditure.

  • Capital addition to any fixed assets, which increases the
    life or efficiency of those assets for example, an addition
    to building.

Revenue Expenditure

Revenue expenditure is the expenditure incurred on the fixed
assets for the ‘maintenance’ instead of increasing the earning
capacity of the assets. Examples of some of the important revenue
expenditures are as follows −

  • Wages/Salary

  • Freight inward & outward

  • Administrative Expenditure

  • Selling and distribution Expenditure

  • Assets purchased for resale purpose

  • Repairs and renewal expenditure which are necessary to keep
    Fixed Assets in good running and efficient conditions

Revenue Expenditure Treated as Capital Expenditure

Following are the list of important revenue expenditures, but
under certain circumstances, they are treated as a capital
expenditure −

  • Raw Material and Consumables − If those are used in
    making any fixed assets.

  • Cartage and Freight − If those are incurred to bring
    Fixed Assets.

  • Repairs & Renewals − If incurred to enhance life
    of the assets or efficiency of the assets.

  • Preliminary Expenditures − Expenditure incurred during
    the formation of a business should be treated as capital
    expenditure.

  • Interest on Capital − If paid for the construction
    work before the commencement of production or business.

  • Development Expenditure − In some businesses, long
    period of development and heavy amount of investment are
    required before starting the production especially in a Tea
    or Rubber plantation. Usually, these expenditure should be
    treated as the capital expenditure.

  • Wages − If paid to build up assets or for the erection
    and installation of Plant and Machinery.

Revenue Expenditure

Deferred Revenue Expenditure

Some non-recurring and special nature of expenditure for which
heavy amount incurred and benefit for the same will spread in
up-coming years, to be treated as capital expenditure and will be
shown as the assets of the firm. Part of the expenditure should
be debited to Profit & Loss account every year. For example,
if heavy amount paid for the advertisement of a product, which
benefits are expected to be received in next four years, then it
should be debited as ¼ of the part in Profit & Loss account
as the revenue expenses and balance ¾ will be shown as the assets
in the Balance-Sheet.

Capital and Revenue Profit

The premium received on issue of shares, and the profit on sale
of fixed assets are the major examples of capital profit and
should not be treated as revenue profit. Capital profit should be
transferred to the capital reserve account, which is used to set
off capital losses in future if any.

Capital and Revenue Receipts

Sale of fixed assets, capital employed or invested, and loans are
the example of capital receipts. On the other hand, sale of
stock, commission received, and interest on investment received
are the main examples of revenue receipts. Revenue receipts will
be credited to the profit and loss account and on the other hand,
capital receipts will affect the Balance-sheet.

Capital and Revenue Losses

Discount on issue of shares and losses on sale of fixed assets
are the capital loss and would be set off against the capital
profits only. Revenue losses on normal business activity are part
of the profit and loss account.

‘; (vitag.displayInit = window.vitag.displayInit ||
[]).push(function () { viAPItag.display(ad_id); }); }())