Capital VS RevenueCapital VS Revenue

A Presentation byA Presentation by

V. P. V. P. Palanichamy,Palanichamy,

BIEEBIEECHENNAI - CHENNAI -

600034600034

Capital RevenueVs

Transactions

Capital Revenue

Capital Expenditure

CapitalReceipts

Revenue Expenditure

Revenue Receipts

Wholly CurrentCharge

Partly Current & Partly Deferred

Wholly Deferred

Capital Expenditure

E.L. Kohler: Capital Expenditure is an expenditure intended to benefit future

period in contrast to a revenue expenditure which benefits a current period.

How do we treat an expenditure as Capital?

1. Expenditure resulting in the acquisition of fixed or long-lived assets.

2. Expenditures resulting in the extension or improvement of fixed assets.

3. Expenditures incurred for the purchase or erection of fixed assets.

4. Cost of overhauling second-hand machine.

5. Expenditure incurred for acquiring the right to carry on business.

6. Expenditures incurred for remodeling and reconditioning an old plant or

property.

7. Major repairs and replacement of plant which results in increased

efficiency.

8. Expenditure incurred for maintaining an asset in working condition.

Capital Expenditure

Revenue Expenditure

E.L. Kohler: Revenue Expenditure is an expenditure charged against operation ; a

term used to contrast with capital expenditure

Revenue ExpenditureHow do we treat an expenditure as Revenue?

1. Cost of goods purchased for re-sale.

2. Expenditures incurred in the normal course of the

business.

3. Expenditures incurred for maintaining the business

4. Obsolescence of fixed assets.

5. Depreciation of fixed assets, loss on sale of asset,

interest on loans taken for business finance, etc.

6. Upkeep of fixed assets etc

Deferred Revenue Expenditure

Statutory Others

A Revenue Expenditure whose benefit extends beyond the year of incurrence

E x p e n d i t u r e

Year1 Year2 Year3

Capital Receipts

Receipts which do not have any effect on the result of the operation of the business

Revenue Receipts

All the recurring income earned during normal course of business

Capital Profits

Profits earned through non / pre operational activities

Revenue Profits

Profits earned during the normal course of business as a result of business operation

Capital Loss

Revenue Loss

ExamplesSpent Rs. 20,000 for remodeling the factory and the value of factory enhanced by Rs.

15,000.

Wages paid for the installation of Machine amounted to Rs. 2,000 and cost of carriage for

the same also amounted to Rs. 500.

An old machine costing Rs. 3,000(or W.D.V Rs. 1,800) was sold for Rs.1,000.

The cost of removal of stock from old factory to the new on amounted to Rs. 1,000.

The expenses incurred for white-washing the factory building amounted Rs. 4,000.

Purchase of patent rights, Rs.4,000 and renewal fee for the next year Rs.400

Cost of repainting the factory building Rs.800.

Compensation paid to a retrenched employee for loss of employment amounted to Rs.

2,000.

Purchase if new tyre for Rs. 2,000 for an old car.

Imported goods worth Rs.20,000 confiscated by customs authorities for non-disclosure of

material facts.

ExamplesFees paid to a lawyer for drawing an agreement of lease for an immovable

property amounted to Rs.1,000.

Expenses incurred on research work for a particular product which

ultimately did not produce any fruitful result amounted to Rs.10,000.

Cost of conversion of gas plant to oil fuel plant for the generation of

electricity amounted to Rs. 20,000.

Plant appearing in the book value Rs. 8,000 and stock valued at Rs. 4,000

were destroyed by fire, amount recovered from the Insurance Company Rs.

10,000 and Rs. 5,000, respectively

Incurred Rs. 4,000 in redecorating a cinema hall and Rs.12,000 in

enhancing the sitting accommodation.

Fire insurance premium of Rs. 1,200 is paid on 30th November for one

year. The accounting date is 31st December.

ExamplesA firm of builders spends Rs. 1,60,000 in purchasing a plot of land and

erects officers for its own use a quarter of the site. The remaining land is

used for building houses which are sold to the Public .

A sum of Rs. 2,000 spent on a machine comprises Rs. 400 for replacement

of worn out parts and Rs. 1,600 for additions to new devices which enable

the output to be doubled.

Visit of sales manager to U.K. total cost of which was 20,000 for promoting

export sales visit is quite successful.

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Knowledge Benefits Ultimate Surrender

Thank You

Palanichamy V PBharadwaj Institute, No 56 North Mada St,Nungambakkam Chennai 34 Ph: 98415-37255

www.bharadwajinstitute.com