Capital Vs Revenue transactions

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Capital Expenditures Generates Economic Benefits for more than Accounting Period Occurred irregularly, once in a while (may be of Big amount) – Financed from long term Capital Results into a Fixed Asset Increase the efficiency/earning capacity of an existing asset.

Capital Expenditures • “Fixed assets means the capital expenditures from which a future economic benefit arises” • Incidental expenses incurred till the assets is put to use • These expenditures are shown as “Assets in Balance Sheet” • Incurred for growth of the business. • Written off in P&L Accounts (as per the accrual of its benefits)

Examples Purchase of a furniture Wages for a construction of a building. Building a floor of an existing building Installation expenses of a Machine. Legal fees to acquire a property

Revenue Expenditure Business’s recurring/regular expenditures Benefit is for a single accounting period Necessary to smoothly run the business financed from the Working Capital Shown in Trading, P& L A/c (Expenses)

Examples Payment of salaries/ rent/ purchases Annual White washing of office Stationery purchases by a Stationery dealer Bad debts

Capital V/s Revenue Expenditures Nature of BusinessPurpose of expenses Recurring nature of expenditure Effect on Revenue generating capacity Materiality of amount involved

Capital Reciepts These are the long term receipts Irregular in nature Not the normal/revenue business activities Creates long term liabilities (Balance Sheet)

Examples Issue of Share Capital/Debentures Donation/ Loan Received Insurance claim on account of machinery damaged Entrance/Life membership fee received by a club

Revenue Reciepts Short term receipts Regular in nature Received in the normal course of business Shown in Trading, P&L A/c (Incomes)

Examples Sales of Goods Interest/Commission earned Collection from Debtors Subsidy from Government for working capital

Deffered Revenue Expenditure Revenue expenditure but the benefit may extend over a number of years. (Deffered) written off in a particular proportion over the years (according to benefits Received) Miscellaneous Expenditures/Fictitious Assets (Non Current Assets-Balance Sheet)

Examples Heavy Advertising expenditure for a new Product Cost of experiments Discount on issue of debentures Preliminary Expenses

Capital Vs Revenue Profit • Profit earned normally/usually in the ordinary course of business – Revenue Profit (Taken to P&l A/c-Cr. Side) • Unusual Profit earned can be regarded as a Capital Profit – Taken to Capital Reserve (Balance Sheet) • Capital Reserve can be used to write off any capital Loss • Examples: Profit earned on Reissue of shares/ Asset sold above Cost (Profit above Cost- Capital Profit, till Cost-Revenue Profit)

MCQs Q.1. Insurance Premium paid for risks against accidental loss of properties is an example of :

MCQs Q.2. Rs. 40,000 spent on repairs of newly purchased old machinery is debited to

MCQs Q.3. Which of the following is an item of expense

MCQs Q.4. Purchase of packing material for distribution of goods from Calcutta Paper Mill Ltd

MCQs Q.5. A Motor Car which was purchased for Rs.20,000 had its book value Rs.12,000 was sold for Rs.25,000 the capital profits will be –

MCQs Q.6. Cost of Goods purchased for resale is an example of

MCQs Q.7. Which of the following is/are an example of capital receipt

MCQs Q.8. Which of the following is a revenue expenditure?

MCQs Q.9. Money spent ` 10,000 as travelling expenses of the directors on trips abroad for purchase of capital assets is

MCQs Q.10. An old furniture was purchased for ` 10,000, it was repaired for ` 100. The repairs Account should be debited by:

Capital Vs Revenue transactions