UNIT -2
Capital and Revenue Items
Introduction
In order to understand the preparation of final accounts, it is essential to understand the difference
between capital and revenue as regards receipts, expenditure, profits and losses.
Each and every business needs to have its final accounts settled. These final accounts mainly consist of
two things: Balance Sheet and Profit and Loss Account. To ascertain the result of business
transactions for an accounting year, Profit and Loss Account is prepared, and to determine the
financial position, Balance sheet is prepared. When capital and revenue items are not classified
accordingly, it will affect profits, fair performance and financial position. From taxation point of
view, the capital and revenue item profits are taxed differently. So, it is important to classify the
capital and revenue items.
Capital Items
The items which have long term effects on business– generally more than one year. It is also defined
as the items which are considered as long-term assets of a form or items that occupy assets section in
balance sheet are called as capital items. Examples of capital items are fixed assets such as land,
building, legal rights etc.
Revenue Items
The items which have short term effects on business: generally, less than a year. Revenue is the
amount that a company gets by selling its goods and services to the customers. There are two main
types of revenue items; (i) revenue expenditure and (ii) revenue receipts. For example, repairs,
wages, salaries, fuel, etc., are revenue items.
Classification of Capital and Revenue Expenditure
Capital Revenue Capital Revenue Capital Revenue
Expenditure Expenditure Receipt Receipt Profits or Profits or
Losses Losses
Capital Expenditure
Capital expenditure comprises all 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.
Examples of capital expenditures are land, building, plant and machinery, patents, trademarks etc.
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 increase the life or efficiency of those assets for
example, an addition to building.
Revenue Expenditure
Revenue expenditure consists of expenditure the benefit of which is used in current accounting
period and which merely seeks to maintain the business. The overall expenditure that is incurred
during the business is referred to as revenue expenditure.
It 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
Capital Receipt
Capital receipts are the income received by the company which is non-recurring in nature. They are
part of the financing and investing activities rather than operating activities. The capital receipts either
reduce an asset or increases a liability. Capital receipt is any amount received permanently or amount
received against sale of fixed assets used for carrying on the business. The receipts can be generated
from the following sources:
Issue of Shares
The issue of debt instruments such as debentures.
Loan taken from a bank or financial institution.
Government grants.
Insurance Claim.
Additional capital introduced by the proprietor.
Revenue Receipt
Revenue Receipts are the receipts which arise through the core business activities. These receipts are a
part of normal business operations that is why they occur again and again however its benefit can be
enjoyed only in the current accounting year as its effect is short term. The income received from the
day-to-day activities of business includes all the operations that bring cash into the business like:
Revenue generated from the sale of inventory
Services Rendered
, Discount Received from the creditors or suppliers
Sale of waste material/scrap.
Interest Received
Receipt in the form of dividend
Rent Received
Capital Profits or Losses
Capital profit means a profit made on the sale of a fixed asset or profit earned on raising monies for
the business. For example, a building purchased for $20,000 is sold for $25,000 the profit $5,000 thus
made is a capital profit.
Capital loss means a loss made on the sale of a fixed asset or a loss incurred in connection with the
raising of money for business. Capital loss may be shown as an asset in the balance sheet. But as this
asset is a fictitious nature, it would advisable to write off it.
Revenue Profits or Losses
Revenue profit is a profit made by the business e.g., profit on the sale of goods, income from
investments, commission earned etc. Revenue profits should be transferred to profit and loss account
because they arise out of regular trading operation. This is a profit which is earned during the
ordinary course of business e.g. profit on sale of goods, rent received, interest received etc.
Revenue loss is the loss incurred in trading operations such as loss on the sale of goods. Revenue
losses are charged to profit and loss account of the year in which they occur. This loss is made in the
ordinary course or day to day operation of a business such as loss on sale of goods etc. Revenue loss
appears in the profit and loss account or income statement in the year in which it occurs.
Capital and Revenue Items
Introduction
In order to understand the preparation of final accounts, it is essential to understand the difference
between capital and revenue as regards receipts, expenditure, profits and losses.
Each and every business needs to have its final accounts settled. These final accounts mainly consist of
two things: Balance Sheet and Profit and Loss Account. To ascertain the result of business
transactions for an accounting year, Profit and Loss Account is prepared, and to determine the
financial position, Balance sheet is prepared. When capital and revenue items are not classified
accordingly, it will affect profits, fair performance and financial position. From taxation point of
view, the capital and revenue item profits are taxed differently. So, it is important to classify the
capital and revenue items.
Capital Items
The items which have long term effects on business– generally more than one year. It is also defined
as the items which are considered as long-term assets of a form or items that occupy assets section in
balance sheet are called as capital items. Examples of capital items are fixed assets such as land,
building, legal rights etc.
Revenue Items
The items which have short term effects on business: generally, less than a year. Revenue is the
amount that a company gets by selling its goods and services to the customers. There are two main
types of revenue items; (i) revenue expenditure and (ii) revenue receipts. For example, repairs,
wages, salaries, fuel, etc., are revenue items.
Classification of Capital and Revenue Expenditure
Capital Revenue Capital Revenue Capital Revenue
Expenditure Expenditure Receipt Receipt Profits or Profits or
Losses Losses
Capital Expenditure
Capital expenditure comprises all 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.
Examples of capital expenditures are land, building, plant and machinery, patents, trademarks etc.
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 increase the life or efficiency of those assets for
example, an addition to building.
Revenue Expenditure
Revenue expenditure consists of expenditure the benefit of which is used in current accounting
period and which merely seeks to maintain the business. The overall expenditure that is incurred
during the business is referred to as revenue expenditure.
It 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
Capital Receipt
Capital receipts are the income received by the company which is non-recurring in nature. They are
part of the financing and investing activities rather than operating activities. The capital receipts either
reduce an asset or increases a liability. Capital receipt is any amount received permanently or amount
received against sale of fixed assets used for carrying on the business. The receipts can be generated
from the following sources:
Issue of Shares
The issue of debt instruments such as debentures.
Loan taken from a bank or financial institution.
Government grants.
Insurance Claim.
Additional capital introduced by the proprietor.
Revenue Receipt
Revenue Receipts are the receipts which arise through the core business activities. These receipts are a
part of normal business operations that is why they occur again and again however its benefit can be
enjoyed only in the current accounting year as its effect is short term. The income received from the
day-to-day activities of business includes all the operations that bring cash into the business like:
Revenue generated from the sale of inventory
Services Rendered
, Discount Received from the creditors or suppliers
Sale of waste material/scrap.
Interest Received
Receipt in the form of dividend
Rent Received
Capital Profits or Losses
Capital profit means a profit made on the sale of a fixed asset or profit earned on raising monies for
the business. For example, a building purchased for $20,000 is sold for $25,000 the profit $5,000 thus
made is a capital profit.
Capital loss means a loss made on the sale of a fixed asset or a loss incurred in connection with the
raising of money for business. Capital loss may be shown as an asset in the balance sheet. But as this
asset is a fictitious nature, it would advisable to write off it.
Revenue Profits or Losses
Revenue profit is a profit made by the business e.g., profit on the sale of goods, income from
investments, commission earned etc. Revenue profits should be transferred to profit and loss account
because they arise out of regular trading operation. This is a profit which is earned during the
ordinary course of business e.g. profit on sale of goods, rent received, interest received etc.
Revenue loss is the loss incurred in trading operations such as loss on the sale of goods. Revenue
losses are charged to profit and loss account of the year in which they occur. This loss is made in the
ordinary course or day to day operation of a business such as loss on sale of goods etc. Revenue loss
appears in the profit and loss account or income statement in the year in which it occurs.
