CAPITAL AND REVENUE

EXPENDITURES AND
RECEIPTS

PRESENTED BY: EKTA

 Importance of Distinguishing between Capital
& Revenue Items
• TO DETERMINE WHICH ITEMS APPEAR IN
WHICH FINANCIAL STATEMENT.
Revenue items - profit and loss account
Capital items - balance sheet

• DETERMINATION OF THE NET PROFIT Requires

Matching of revenue expenditure and revenue income
(As per Matching Concept)

PROFITS =
REVENUE RECEIPTS – REVENUE EXPENSES

PRESENTED BY: EKTA

 Capital and Revenue Receipts
• Capital Receipts comprise of
• Contributions of capital into the business by the proprietor,
partners or shareholders
• any sums received from debenture holders,
• any loans and
• Sale proceeds of any fixed assets & long term
investments.

• Revenue Receipts or income

– are the outcome of firm’s activity in the accounting
period;
– money received on sale of goods in trade or on rendering
of services.
• Examples: Sales, commission and fees received, interest
/dividend on investments
PRESENTED BY: EKTA
Distinction Between Capital and Revenue
Receipts
Capital Receipts Revenue Receipts
Includes amounts realized by Includes amount realized
sale of fixed assets or by by sale of goods or
issue of share or debentures. rendering services
It is a receipt in substitution It is a receipt in substitution
of a source of income of an income.
Amount received for Amount received as
surrender of certain rights compensation under an
under an agreement is a agreement for the loss of
capital receipt, because a future receipts is a revenue
capital asset is being given receipt
up in the form of these rights
PRESENTED BY: EKTA
Classification of income

• Capital income
• Revenue income

PRESENTED BY: EKTA

 Capital Profits / Capital Income

Capital profits are profits earned on account of

sale of fixed assets or in connection with share
capital

• Capital income is an income which does not relate to

operations of the business or which does not grow out
of or pertain to the running of the business proper.

PRESENTED BY: EKTA

 Capital Profits / Capital Income
• Examples:
 Share premium,
sale of a fixed asset for a value more than that for
which it was purchased.eg. Capital gain of Rs 150,000
arises when building bought for Rs. 200,000 is sold
for Rs. 350,000.

• Note: Only the profit realised over and above the cost of the fixed
asset should be taken as capital profit (transferred to capital
reserve)
while the profit realised over and above book value of the asset till
PRESENTED
it does not exceed the original costBY:
ofEKTA
the asset should be taken as
 Revenue Profits / Revenue income
Revenue profits are those earned in the
ordinary course of business
• Revenue income is an income which arises out of and in
the course of regular operations of the business concern
• Revenue profits appear in the Profit and Loss Account

• Revenue profit and revenue income are synonymous.

Examples:
Profit made on sale of goods, income received from letting out of the
business property, dividends PRESENTED
received BY:
onEKTA
business investments, etc.
 Expenditure

Expenditure refers to a payment or spending or a

promise to make future payment for benefits
received i.e. for assets or services.

PRESENTED BY: EKTA

 Classification of Expenditure

• Capital Expenditure
• Revenue Expenditure
• Deferred Revenue
Expenditure

PRESENTED BY: EKTA

 Capital Expenditure
Capital Expenditure is any expenditure which is
incurred for the purpose of long term
advantage
Such expenditure is either incurred for
• acquisition of a fixed asset (tangible or intangible) or
• permanent improvement or addition or substitution
or extension to an asset to increase the earning
capacity of the business enterprise

PRESENTED BY: EKTA

 Capital Expenditure
Definition:
Expenditure incurred in purchasing or
constructing property which is intended to
assist in the production of profit or in
permanently improving, enlarging or extending
existing property in order to increase its profit
earning capacity. The direct benefit of such an
expenditure will extend over several trading
periods and it replaces cash by permanent asset.
(Rowland, S.M. in Principles of
Accounting) PRESENTED BY: EKTA
 Guidelines to determine that expenditure is
capital expenditure:
1. Increases Profits
• If expenditure is for the purpose of increasing profit
either positively by increasing earning capacity or
negatively by decreasing working expenditure (day to
day expenses)
2. Produces an asset
• If whether increasing the earning capacity or not, it
produces an asset comparatively permanent in
nature. PRESENTED BY: EKTA
 Examples of Capital Expenditure

1. Purchase of permanent tangible asset

– such as plant and machinery, office equipment, furniture

2. All sums spent up to the point an asset is ready for use

– including expenditure on its purchase, receipt or erection
• eg. cartage charges paid to bring the machinery to factory,

• installation charges,

• fees paid to lawyer for drawing land purchase deed,

• overhauling expenses of second-hand machinery,

PRESENTED BY: EKTA
 Examples of Capital Expenditure
3. Financing cost for a fixed asset
• (i.e. interest paid on loans to purchase a fixed asset) for the
period up to the time the asset is put to use. Such interest is
added to the cost of fixed asset.

4. The amount spent on existing asset for the purpose of

its improvement or extension
• which will raise the output or reduce the cost of
production

5. Money paid for goodwill

6. Money spent to reduce working expenses
• eg. Conversion of hand-driven machinery
PRESENTED BY: EKTA to power-driven
 Revenue Expenditure

These are expenses whose benefit expires within

the year of expenditure and which are incurred
to maintain the earning capacity of existing
assets.
• It is an expenditure on consumable items,
on services and on goods acquired for
resale.

PRESENTED BY: EKTA

 Revenue Expenditure
Revenue items generally include:
• The cost of materials used in manufacturing goods
intended for resale.
• Wages paid in connection with the production of goods
meant for sale.
• Selling and distribution expenses.
• All expenses incidental to the working of the
business
such as depreciation, rent, salaries, interest, etc.
• All expenses incurred for maintaining the efficiency of
fixed assets by means of repairs, replacement, renewals
PRESENTED BY: EKTA
 Principles for determining the nature of
expenditure
1. Expenditure in the
– acquisition of an income earning asset - capital
expenditure
– in the process of earning of the profits - revenue
expenditure.
2. Expenditure made for the initiation or extension of a
business or for a substantial replacement of equipment -
deemed to be capital
3. Expenditure made not only once and for all but brings
into existence an asset or an long term advantage -
capital expenditure
4. Whether the expenditure incurred was part of the fixed
capital of the business or part of its circulating capital
PRESENTED BY: EKTA
 Distinction between Capital and Revenue Expenditure
Capital Expenditure Revenue Expenditure
Incurred in acquiring or Is a routine expenditure incurred
improving permanent assets not in the normal course of business
meant for resale. May add to and includes cost of sales and
value of an existing asset maintenance of fixed assets.
Increases earning capacity Maintains the earning capacity
It is normally a non-recurring It is usually a recurring item
outlay.
It produces benefit over It is consumed within an
several years. accounting year i.e. benefits
Thus a small part is charged only one year.
to Thus entire amount is charged to
income statement as depreciation income statement.Does not
and the rest appears in the appear in the balance sheet.
balance sheet
Is an item of balance sheet PRESENTEDShown
BY: EKTA in Trading and profit &
Revenue Expenditure becoming Capital Expenditure
Certain revenue expenditures are treated as capital expenditures since
they lead to the establishment of business and its efficient running in
the following circumstances:
1. Wages: wages on erection of plant & machinery or construction

2. Raw material and stores used in construction of fixed asset

3. Transport charges: incurred for new plant & machinery
4. Interest on capital: Interest on capital especially where the nature
of business requires construction work for a long period, before
the commencement of the production.
5. Legal expenses: Legal expenses incurred to acquire the assets
6. Repairs: Repairs on purchases of second-hand asset to put
into workable conditionPRESENTED BY: EKTA
 Deferred Revenue Expenditure

Deferred revenue expenditures are expenditures which

are basically in the nature of revenue expenditure but
whose benefit covers a number of years i.e. their benefit
may extend over a number of years.

For Example: Heavy advertising expenditure incurred in

introducing a new line or developing a new market, Cost of
issuing shares and debentures, Cost of experiments, discount
on debentures, Preliminary expenses

PRESENTED BY: EKTA

 Distinction between Capital Expenditure
and Deferred Revenue Expenditure
1. Nature of expenditure -deferred revenue expenditure is a
revenue in nature but it is incurred for > one accounting
yr
2. Years of benefit: The deferred revenue expenditure
benefits lesser number of years in comparison to capital
expenditure.
– Deferred revenue expenditure-for 3-5 years
– Capital expenditure-for 10-15 years
3. Recovery:
– Deferred revenue expenditure - once incurred cannot
be recovered back generally
PRESENTED BY: EKTA
– Capital expenditure - capable of being reconverted into
Thank you

PRESENTED BY: EKTA