What is a Capital and revenue Account?Differentiate between capital expenditures and revenue expenditures
What is a Capital and revenue concept?
What is a Capital and revenue concept?
In order to ascertain true and fair
results and financial condition of a co
ncern for a years, the nature of the
transactions taking place during the year are to be analyzed. Transactions may
be divided into two groups on the basis of character or feature:
A. Capital
B. Revenue
In the business, some transactions having long effect while some others have short term effects. The transactions having the long effect are known s capital transactions and those having short term effect ae revenue transactions. For example, machinery is used for a long term. So purchase of machinery is a transaction. But stationary and postage materials are meant for day to day use are consumed in a short period. Is revenue transaction.
We can study with the help of the following chart:
Transactions
Capital
Capital receipt
Capital expenditure
Capital profit
Capital loss
Revenue
Revenue
Revenue expenditure
Revenue profit
Revenue loss
On the basis of the above diagram, the related terms of this chapter may be defined as follows:
• Capital expenditure and revenue receipt
• Capital receipt and revenue receipt
• Capital profit and revenue profit
• Capital loss and revenue loss
Capital expenditure
Those expenditures which are incurred to acquire the fixed assets are capital expenditure. It consists of those expenditures which benefit is not fully consumed in one period but spread over several periods. It includes expenditures incurred on acquiring assets for the purpose of earning and not for re-sale, improving and extending fixed assets, increasing the earring capacity of the assets and raising capital for the business which are shown in the assets side of balance sheet.
The examples of capital expenditure are:
1. Expenditure incurred for acquiring fixed assets:
a. Purchase of new plant and machinery
b. Purchase of land and building
c. Purchase of furniture and fixtures
d. Purchase of trde marks, patents, goodwill etc.
e. Installation cot of new assets.
2. Expenditures incurred for old assets of a firm:
a. Cost of repairs and renewals of fixed assets.
b. Cost of erection of plant and machinery.
3. Expenditure incurred on old assets in the improvement or extension of the business.
a. Additions to land nd building and plant and machinery.
b. Cost of removing the business to more spacious and better suited premises.
c. Cost of increasing capacity of fixed assets.
d. Extension of old fixed assets.
4. Expenditure spend on raising the capital:
a. Discount on issue of shares/debentures.
b. Shares underwriting omission.
c. Brokerage commission.
5. Expenditure incurred for the establishment of a firm:
a. Registration fees.
b. Advertisement expenses.
c. Legal and consultancy fees.
d. Research and development expenses.
Revenue expenditure
a. Cost of trading goods for re-sale.
b. Cost of raw materials, consumable stores etc.
2. Expenditure incurred to maintain fixed assets for working condition:
a. Repairs, maintenance and depreciation of fixed assets.
b. Replacement of fixed assets etc.
3. Expenditures incurred in the business:
a. Salaries, wages, legal fees, rent, rates and taxes, insurance premium, fuel and power, water and gas, lighting and heating, bank charge, telephone and trunk call charges, printing and stationery, postage and stamps, bad debts, discount, interest, commission etc.
Differentiate between capital expenditures and revenue expenditures
Capital expenditures
1. Those expenditures which re incurred to acquire fixed assets.
2. These are non-recurring expenditures.
3. They represent unexpired cost i.e. cost of benefit for use in future.
4. They help to increase earing capacity of the firm.
5. They are taken asset side of balance sheet.
6. They are transferable.
Revenue expenditures
1. Those expenditures which are incurred in the business day to day for its operation.
2. These are recurring expenditures.
3. They are representing expired cost whose benefits are received in current accounting year.
4. They help to earn exiting revenue.
5. They are taken to profit and loss account.
6. They are not transferable.
Capital receipts
Those receipts which re created/generated in the form of capital owner and as loan from outsides is called capital receipts.
It also includes the amount received from sale of fixed assets by assets, by issuing and debenture etc. it is shown on liabilities side of balance sheets.
For example
a. Bank loan
b. Loan from others
c. Amount/ cash received by selling fixed assets
d. Cash collected by issuing shares and debentures.
e. Amount received from owner as additional capital or seed capital.
Revenue receipts
Those receipts which are created/generated from the business by day to operation. It is the amount received from sales proceeds of goods or services on investments. It is regular income of the concern. It is shown in credit side of the trading and profit and loss account.
For example
a. Amount received from sales of gods or services
b. Discount received
c. Interest received
d. Rent received etc
e. Commission received
Differentiate between capital receipts and revenue receipts
Capital receipts
1. It effect is not exhausted in the present accounting years. It is also enjoyed in futer years.
2. It is non-recurring in nature as it does not occur again and again.
3. It is shown in liabilities side of balance sheet.
4. It is the amount received from sale of fixed assets, issuing shares and debentures.
5. It is received in the form of capital.
Revenue receipts
1. Its effect is exhausted within the current accounting year.
2. It is recurring in nature and it receives regularly and repeatedly.
3. It is shown in a credit side of profit and loss account.
4. It is the amount received from sale of goods or services.
5. It is received as incomes.
Capital profits
Those profits which are earned by selling fixed than their book value or by issuing shares or debentures more than face value are called capital profits. They should be transfer to capital reserve capital account which is shown in the balance sheets as liability.
Revenue profit
Those profit wich are earned form business by day to day operation whith the help of selling trading goods. These are income of the business so they should be shown on credit side of trading and profit and loss account.
For example:
a. Profit earned by selling trading goods.
b. Discount, commission received.
c. Income from investment etc.
Differentiate between capital profit and revenue profits:
Capital profit
1. It is generated from sale of fixed assets.
2. It is shown on the liabilities side of the balance sheets as capital reserve.
3. It is not distributed to shareholders as dividend.
Revenue profits
1. It is generate from sale of goods or services.
2. It is shown on credit side of trading and profit and loss account.
3. It is distributed to shareholders as dividend.
Capital loss
Those losses which are generated from sale of the fixed assets and issue of the shares and debentures are capital losses. They also consist the losses occurred on raising capital. They are loss of capital nature. So they should be shown on assets side of balance sheet.
For example:a. Loss on sale of fixed assets at a price than book value.
b. Loss or discount on issued of shares or debentures.
c. Premium on redemption of debentures etc.
Revenue loss
Those losses which are created/generated at the business from operating activities are called revenue losses. They are shown on the debit side of trading and profit and loss account.
For example:a. Loss on sale of goods or services.
b. Loss on goods lost/theft etc.
Differentiate between capital losses and revenue losses
Capital losses
1. It is generated in the sale of fixed assets or by issuing shares or debentures.
2. It is used to meet capital losses.
3. It is shown on assets side in balance sheet.
Revenue losses
1. It is created/generated in the sale of trading goods or services.
2. It is used to strengthen the financial position, distribute dividend etc.
3. It is shown on debit side of trading and profit and loss account.
In the business, some transactions having long effect while some others have short term effects. The transactions having the long effect are known s capital transactions and those having short term effect ae revenue transactions. For example, machinery is used for a long term. So purchase of machinery is a transaction. But stationary and postage materials are meant for day to day use are consumed in a short period. Is revenue transaction.
We can study with the help of the following chart:
Transactions
Capital
Capital receipt
Capital expenditure
Capital profit
Capital loss
Revenue
Revenue
Revenue expenditure
Revenue profit
Revenue loss
On the basis of the above diagram, the related terms of this chapter may be defined as follows:
• Capital expenditure and revenue receipt
• Capital receipt and revenue receipt
• Capital profit and revenue profit
• Capital loss and revenue loss
Capital expenditure
Those expenditures which are incurred to acquire the fixed assets are capital expenditure. It consists of those expenditures which benefit is not fully consumed in one period but spread over several periods. It includes expenditures incurred on acquiring assets for the purpose of earning and not for re-sale, improving and extending fixed assets, increasing the earring capacity of the assets and raising capital for the business which are shown in the assets side of balance sheet.
The examples of capital expenditure are:
1. Expenditure incurred for acquiring fixed assets:
a. Purchase of new plant and machinery
b. Purchase of land and building
c. Purchase of furniture and fixtures
d. Purchase of trde marks, patents, goodwill etc.
e. Installation cot of new assets.
2. Expenditures incurred for old assets of a firm:
a. Cost of repairs and renewals of fixed assets.
b. Cost of erection of plant and machinery.
3. Expenditure incurred on old assets in the improvement or extension of the business.
a. Additions to land nd building and plant and machinery.
b. Cost of removing the business to more spacious and better suited premises.
c. Cost of increasing capacity of fixed assets.
d. Extension of old fixed assets.
4. Expenditure spend on raising the capital:
a. Discount on issue of shares/debentures.
b. Shares underwriting omission.
c. Brokerage commission.
5. Expenditure incurred for the establishment of a firm:
a. Registration fees.
b. Advertisement expenses.
c. Legal and consultancy fees.
d. Research and development expenses.
Revenue expenditure
Those expenditures which are incurred to operate the business are called revenue expenditures. The full benefits of such expenditures are consumed in same accounting period i.e. one year. It is necessary for the maintenance of earring capacity of business which are shown debit side of profit and loss account. The example of revenue expenditures are:
1. Expenditure incurred to purchase raw materials or re-sales goods:a. Cost of trading goods for re-sale.
b. Cost of raw materials, consumable stores etc.
2. Expenditure incurred to maintain fixed assets for working condition:
a. Repairs, maintenance and depreciation of fixed assets.
b. Replacement of fixed assets etc.
3. Expenditures incurred in the business:
a. Salaries, wages, legal fees, rent, rates and taxes, insurance premium, fuel and power, water and gas, lighting and heating, bank charge, telephone and trunk call charges, printing and stationery, postage and stamps, bad debts, discount, interest, commission etc.
Differentiate between capital expenditures and revenue expenditures
Capital expenditures
1. Those expenditures which re incurred to acquire fixed assets.
2. These are non-recurring expenditures.
3. They represent unexpired cost i.e. cost of benefit for use in future.
4. They help to increase earing capacity of the firm.
5. They are taken asset side of balance sheet.
6. They are transferable.
Revenue expenditures
1. Those expenditures which are incurred in the business day to day for its operation.
2. These are recurring expenditures.
3. They are representing expired cost whose benefits are received in current accounting year.
4. They help to earn exiting revenue.
5. They are taken to profit and loss account.
6. They are not transferable.
Capital receipts
Those receipts which re created/generated in the form of capital owner and as loan from outsides is called capital receipts.
It also includes the amount received from sale of fixed assets by assets, by issuing and debenture etc. it is shown on liabilities side of balance sheets.
For example
a. Bank loan
b. Loan from others
c. Amount/ cash received by selling fixed assets
d. Cash collected by issuing shares and debentures.
e. Amount received from owner as additional capital or seed capital.
Revenue receipts
Those receipts which are created/generated from the business by day to operation. It is the amount received from sales proceeds of goods or services on investments. It is regular income of the concern. It is shown in credit side of the trading and profit and loss account.
For example
a. Amount received from sales of gods or services
b. Discount received
c. Interest received
d. Rent received etc
e. Commission received
Differentiate between capital receipts and revenue receipts
Capital receipts
1. It effect is not exhausted in the present accounting years. It is also enjoyed in futer years.
2. It is non-recurring in nature as it does not occur again and again.
3. It is shown in liabilities side of balance sheet.
4. It is the amount received from sale of fixed assets, issuing shares and debentures.
5. It is received in the form of capital.
Revenue receipts
1. Its effect is exhausted within the current accounting year.
2. It is recurring in nature and it receives regularly and repeatedly.
3. It is shown in a credit side of profit and loss account.
4. It is the amount received from sale of goods or services.
5. It is received as incomes.
Capital profits
Those profits which are earned by selling fixed than their book value or by issuing shares or debentures more than face value are called capital profits. They should be transfer to capital reserve capital account which is shown in the balance sheets as liability.
Revenue profit
Those profit wich are earned form business by day to day operation whith the help of selling trading goods. These are income of the business so they should be shown on credit side of trading and profit and loss account.
For example:
a. Profit earned by selling trading goods.
b. Discount, commission received.
c. Income from investment etc.
Differentiate between capital profit and revenue profits:
Capital profit
1. It is generated from sale of fixed assets.
2. It is shown on the liabilities side of the balance sheets as capital reserve.
3. It is not distributed to shareholders as dividend.
Revenue profits
1. It is generate from sale of goods or services.
2. It is shown on credit side of trading and profit and loss account.
3. It is distributed to shareholders as dividend.
Capital loss
Those losses which are generated from sale of the fixed assets and issue of the shares and debentures are capital losses. They also consist the losses occurred on raising capital. They are loss of capital nature. So they should be shown on assets side of balance sheet.
For example:a. Loss on sale of fixed assets at a price than book value.
b. Loss or discount on issued of shares or debentures.
c. Premium on redemption of debentures etc.
Revenue loss
Those losses which are created/generated at the business from operating activities are called revenue losses. They are shown on the debit side of trading and profit and loss account.
For example:a. Loss on sale of goods or services.
b. Loss on goods lost/theft etc.
Differentiate between capital losses and revenue losses
Capital losses
1. It is generated in the sale of fixed assets or by issuing shares or debentures.
2. It is used to meet capital losses.
3. It is shown on assets side in balance sheet.
Revenue losses
1. It is created/generated in the sale of trading goods or services.
2. It is used to strengthen the financial position, distribute dividend etc.
3. It is shown on debit side of trading and profit and loss account.
Thank you for sharing this understanding about revenue vs profit. I am familiar with these terms, but this is a good read explaining them well. It is much easier to understand with these graphs.
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