capital vs revenue transactions

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CAPITAL V/S REVENUE

TRANSACTIONS

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)

Capital Expenditures

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

Examples

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)

Revenue Expenditure

Payment of salaries/ rent/ purchases

Annual White washing of office

Stationery purchases by a Stationery dealer

Bad debts

Examples

Nature of Business Purpose of expenses

Recurring nature of expenditure

Effect on Revenue generating capacity

Materiality of amount involved

Capital V/s Revenue Expenditures

These are the long term receipts

Irregular in nature

Not the normal/revenue business activities

Creates long term liabilities (Balance Sheet)

Capital Reciepts

Issue of Share Capital/Debentures

Donation/ Loan Received

Insurance claim on account of machinery damaged

Entrance/Life membership fee received by a club

Examples

Short term receipts

Regular in nature

Received in the normal course of business

Shown in Trading, P&L A/c (Incomes)

Revenue Reciepts

Sales of Goods

Interest/Commission earned

Collection from Debtors

Subsidy from Government for working capital

Examples

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)

Deffered Revenue Expenditure

Heavy Advertising expenditure for a new Product

Cost of experiments

Discount on issue of debentures

Preliminary Expenses

Examples

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)

Capital Vs Revenue Profit

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

MCQs

Revenue Expenditure

Capital Receipts

Deferred Revenue Expenditure

Capital Expenditure

A

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

MCQs

Repair Account

Cash A/c

General expenses A/c

Machinery A/

D

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

MCQs

Charges paid for installation of machinery

Recovery of electricity bills paid for employees

Payment of electricity deposit

Payment of electricity bill

D

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

MCQs

Revenue expenditure

Capital expenditure

Deferred revenue expenditure

None of the above

A

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

Rs.5,000

Rs.8,000

Rs.13,000

Rs.25,000

A

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

MCQs

Capital Expenditure

Revenue Expenditure

Deferred Revenue Expenditure

None of these

B

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

MCQs

Sale proceed of fixed asset

Loan raised from financial institutions

Sale of investment

All the three

D

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

MCQs

Freight paid on purchase of plant and machinery

Legal expenses pain to acquire a property

Expenses incurred to reduce working capital requirement

Annual whitewash of the factory building

D

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

MCQs

Capital Expenditures

Revenue Expenditures

Deferred Revenue Expenditures

None of the Above

A

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

MCQs

` 10,000

` 10,100

` 100

Nil

D