3rd Chapter of B.com 11nd sem FA

2. Capital and Revenue

Once the trial balance is prepared the next step is to find out the net result (profit or loss account) and financial position (balance sheet) of the business concern. The business concern’s financial position is bound to be affected by the result of its operations.

Capital Expenditure

Capital expenditure consist of those expenditures, the benefit of which is carried over to several accounting periods. In other words the benefit of which is not consumed within one accounting period. It is non-recurring in nature.

Characteristics

In other words, it refers to the expenditure, which may be

i. purchase of a fixed asset.

ii. not acquired for sale.

iii. it is non-recurring in nature.

iv. incurred to increase the operational efficiency of the business concern.

Examples

i. Expenses incurred in the acquisition of Land, Building, Machinery, Furniture, Car, Goodwill, Copyright, Trade Mark, Patent Right, etc.

ii. Expenses incurred for increasing the seating accommodation in a cinema hall.

iii. Expenses incurred for installation of fixed assets like wages paid for installing a plant.

Capital Receipt

Capital receipt is one which is invested in the business for a long period. It includes long term loans obtained from others and any amount realised on sale of fixed assets. It is generally non-recurring in nature.

Characteristics

i. Amount is not received in the normal course of business.

ii. It is non-recurring in nature.

Examples

i. Capital introduced by the owner

ii. Borrowed loans

iii. Sale of fixed asset

Revenue Expenditure

Revenue expenditures consist of those expenditures, which are incurred in the normal course of business. They are incurred in order to maintain the existing earning capacity of the business. It helps in the upkeep of fixed assets. Generally it is recurring in nature.

Characteristics

i. It helps in maintaining the earning capacity of the business concern.

ii. It is recurring in nature.

Examples

i. Cost of goods purchased for resale.

ii. Office and administrative expenses.

iii. Selling and distribution expenses.

Revenue Receipt

Revenue receipt is the receipt of income which is earned during the normal course of business. It is recurring in nature.

Characteristics

i. It is received in the normal course of business.

ii. It is recurring in nature.

Examples

i. Sale of goods or services.

ii. Commission and Discount received.

iii. Dividend and interest received on investments etc.

Deferred Revenue Expenditure

A heavy revenue expenditure, the benefit of which may be extended over a number of years, and not for the current year alone is called deferred revenue expenditure. For example, a new firm may advertise very heavily in the beginning to capture a position in the market. The benefit of this advertisement campaign will last for quite a few years. It will be better to write off the expenditure in three or four years and not only in the first year.

Characteristics

i. Benefit is enjoyed for more than one year

ii. It is non-recurring in nature

Examples

i. Expenses incurred on research and development

ii. Abnormal loss arising out of fire or lightning (in case the asset has not been insured).

iii. Huge amount spent on advertisement.

Capital profits

Capital profit is the profit which arises not from the normal course of the business. Profit on sale of fixed asset is an example for capital profit.

Revenue profits

Revenue profit is the profit which arises from the normal course of the business. i.e, Net Profit – the excess of revenue receipts over revenue expenditures.

Capital Losses

Capital losses are the losses which arise not from the normal course of business. Loss on sale of fixed asset is an example for capital loss.

Revenue Losses

Revenue losses are the losses that arise from the normal course of the business. In other words, ‘net loss’ – i.e., excess of revenue expenditures over revenue receipts.