Capital vs Revenue

Capital Transactions Revenue Transactions

Relating to capital items Relating to revenue items
long term effects (normally > 1 year) short term effects (normally < 1 year)

Treatment of Capital & Revenue Items in Financial Statements

Items Treatment
Capital Expenditure Shown as a Non-Current Asset in Balance Sheet
Revenue Expenditure Shown as an expense in the Income Statement
Capital Receipt Shown as a liability or reduce the value of Capital Exp
Revenue Receipt Shown as an income in Income Statement
 Distinction between Capital & Revenue Expenditures

● Capital Expenditure
An expense is said to be Capital Expenditure if it fulfills any of the following:
○ Expenditures for acquisition of a Non-Current Asset
◦ Purchase Price
◦ Incidental costs connected with the acquisiton of NCA
installation costs
import duty
registration charges
legal expenses to acquire
carriage to bring the NCA for the first time
etc
○ Expenditures for improving efficiency / capacity of a Non-Current Asset
◦ replacement of a power unit of a machinery by one of a greater capacity

○ Expenditure on extension of Business

◦ construction or extension of building

○ Expenditures to increase the useful life of a Non-Current Asset

○ Expenditures to bring the asset in working condition

◦ painting of the building for the first time

○ Expenditures of Abnormal amounts

● Revenue Expenditure
An expense is said to be Revenue Expenditure if it fulfills any of the following:
○ Expenditures for acquisition and use of goods / inventory
◦ Purchase Price
◦ All other costs required to bring & use the inventory
◦ All Income Statement Expenses

○ Expenditures for maintaining efficiency / capacity of a Non-Current Asset

◦ repainting of a builiding
◦ changing oil of a motor vehicle
◦ service of Air conditioner
 Distinction between Capital & Revenue Receipts

● Capital Receipt
○ Include amounts received on account of
◦ new capital (owner's capital and/or loan capital)
◦ sale of a Non-Current Asset

● Revenue Receipt
○ Amounts received from
◦ sale of goods
◦ providing services of business assets to other businesses
all income statement other incomes
 Effects of wrong treatment of capital and revenue items

Revenue Expenditure treated as Capital Expenditure

Effect in Income Statement Effect in Statement of Financial Position
Expenses Understated
Non-Current Assets Overstated
Profit Overstated

Capital Expenditure treated as Revenue Expenditure

Effect in Income Statement Effect in Statement of Financial Position
Expenses Overstated
Non-Current Assets Understated
Profit Understated
 Revenue Receipt treated as Capital Receipt
Effect in Income Statement Effect in Statement of Financial Position
Incomes Understated
Depends on the transaction
Profit Understated

Capital Expenditure treated as Revenue Expenditure

Effect in Income Statement Effect in Statement of Financial Position
Incomes Overstated
Depends on the transaction
Profit Overstated