The transactions which relate to capital are again sub-divided into capital expenditure and capital receipt.

11.1.1 Capital Expenditure CHAPTER - 11

CAPITAL AND REVENUE TRANSACTIONS

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

Learning Objectives In other words, it refers to the expenditure, which may be After studying this Chapter, you will be able to: identify Capital, Revenue and Deferred Revenue Expenditures. understand Capital and Revenue receipts. i. ii. iii. iv. purchase of a fixed asset. not acquired for sale. it is non-recurring in nature. incurred to increase the operational efficiency of the business concern.

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 concerns financial position is bound to be affected by the result of its operations. Matching Principle governs the preparation of these two statements. According to this principle the revenues and relevant expenditures incurred during a particular period should be matched. Thus a proper distinction must be accounted for between capital and revenue transactions. Business transactions can be capital transactions or revenue transactions. 11.1 Capital Transactions The business transactions, which provide benefits or supply services to the business concern for more than one year or one operating cycle of the business, are known as capital transactions.
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Examples

i.

Expenses incurred in the acquisition of Land, Building, Machinery, Furniture, Car, Goodwill, Copyright, Trade Mark, Patent Right, etc. Expenses incurred for increasing the seating accommodation in a cinema hall. Expenses incurred for installation of fixed assets like wages paid for installing a plant. Expenses incurred for remodelling and reconditioning an existing asset like remodeling a building.

ii. iii. iv.

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11.1.2. Capital Receipt

Examples

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. ii. iii. iv. v.

Cost of goods purchased for resale. Office and administrative expenses. Selling and distribution expenses. Depreciation of fixed assets, interest on borrowings etc. Repairs, renewals, etc.

i. ii.

Amount is not received in the normal course of business. It is non-recurring in nature.

11.2.2 Revenue Receipt

Examples

i. ii. iii.

Capital introduced by the owner Borrowed loans Sale of fixed asset

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

i. ii.

It is received in the normal course of business. It is recurring in nature.

11.2 Revenue Transactions The business transactions, which provide benefits or supplies services to a business concern for an accounting period only, are known as revenue transactions. Revenue transactions can be Revenue Expenditure or Revenue Receipt.
11.2.1 Revenue Expenditure

Examples

i. ii. iii.

Sale of goods or services. Commission and Discount received. Dividend and interest received on investments etc.

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

11.3 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.

i. ii.

It helps in maintaining the earning capacity of the business concern. It is recurring in nature.
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Characteristics

11.5.1 Capital profits

i. Benefit is enjoyed for more than one year ii. It is non-recurring in nature
Examples

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.
11.5.2 Revenue profits

i. ii. iii.

Expenses incurred on research and development Abnormal loss arising out of fire or lightning (in case the asset has not been insured). Huge amount spent on advertisement.

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. 11.6 Capital loss and Revenue loss In order to ascertain the loss incurred by a firm it is important to distinguish between capital losses and revenue losses.
11.6.1 Capital Losses

11.4 Revenue expenditure, Capital Expenditure and Deferred revenue expenditure Distinction
S.No. 1. Basis of Distinction Capital Expenditure Revenue Expenditure Deferred Revenue Expenditure

Period of benefit Benefit is enjoyed Benefit is consumed Benefit enjoyed for beyond the during the current more than one year accounting year,year only. lasts for a long time Purpose Relates to the acquisition of fixed assets. Non-recurring in nature. Incurred for the purpose of generating revenue. Recurring in nature Relates to the capturing or retaining the market Non-recurring in nature. Helps to increase the earning capacity of the business. Cannot be con-verted into cash.

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.
11.6.2 Revenue Losses

2.

3. 4.

Nature of occurance Aim

Helps to increase Helps to earn the the earning capacity exisiting revenue of the business. Converted into cash. Cannot converted into cash.

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. Illuatration 1: Shyam & Co., incurred the following expenses during the year 2003.Classify the following items under capital or revenue i. ii. iii. Purchase of furniture Rs.1,000. Purchase of second hand machinery Rs.4,000. Rs.50 paid for carriage on goods purchased.
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5.

Convertibility

11.5 Capital profit and Revenue profit In order to find out the correct profit and the true financial position, there must be a clear distinction between capital profit and revenue profit.
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iv. v. Solution i. ii. iii. iv. v.

Rs.175 paid for repairs on second hand machinery as soon as it was purchased. Rs.600 wages paid for installation of plant.

Solution i. ii. Capital expenditure as the amount spent results in acquisition of fixed assets. Capital expenditure as the amount was spent on acquiring a right to carry on business. Revenue expenditure amount spent relates to only one year. Deferred revenue expenditure it is a heavy advertising expenditure as the benefit will last more than one year. Revenue expenditureincurred for the functioning of business.

Capital expenditure as it results in the acquisition of fixed asset. Capital expenditure as it results in the acquisition of fixed asset. Revenue expenditure expenses incurred on purchases of goods for sale. Capital expenditure as it is spent for bringing the asset into working condition. Capital expenditure as it is spent for bringing the asset into working condition.

iii. iv. v.

Illustration 3 Hari & Co. incurred the following expenses during the year 2003 Classify the expenses as capital and revenue. i. ii. iii. iv. v. Solution i. ii. iii. Capital expenditure as it helps to increase the working condition of the machinery. Capital expenditure as it is spent as it helps to get a capital receipt. Revenue expenditure as it is spent for the maintenance of the asset.
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Illustration 2 Prasad Pictures Ltd. constructed a cinema house and incurred the following expenditures during the year ended 31.12.2003. i. ii. iii. iv. Second hand furniture purchased worth Rs.3,00,000. Expenses in connection with obtaining a license were Rs.30,000. Fire insurance, Rs.2500 was paid on 1 January 2003 for one year. During the first week after the release of the cinema, free tickets worth Rs.30,000 were distributed to increase the publicity of the cinema house. The managers salary for the year was Rs.60,000.
st

Rs.750 spent towards replacement of a worn out part in a machinery. Rs.1,500 spent for legal expenses in relation to raising of a loan for the business. Rs.300 spent for ordinary repairs of plant. Rs.6,000 spent on replacing a petrol driven engine by a diesel driven engine. Electricity charges Rs.1,200 per month.

v.

Classify the above transactions into capital, revenue and deferred revenue expenditures.
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iv. v.

Capital expenditure as it helps to reduce cost of production. Revenue expenditure expenditure incurred in the normal course of the business.

Illustration 5 Bharat company has incurred the following expenditure you are required to identify the capital, revenue and deferred revenue expenses. i. Rs.60,000 travelling expenses of their sales manager who travelled to Japan to attend a meeting in order to increase sales trip was quite successful. Rs.500 spent for installing machinery. Rs.6,00,000 spent on research and development. Rs.500 paid for fuel.

Illustration 4 Fashion Textiles gives the following transactions of their firm during the year 2003, you are required to classify the transactions into capital or revenue. i. ii. iii. iv. v. Solution i. ii. Revenue expenditure as it spent to replace a part of the lorry. Capital loss Rs.500 as they have incurred a loss on sale of fixed asset and Rs.9,500 will be a capital receipt as it is a sale of fixed asset. Revenue receipt earned in the ordinary course of business. Revenue receipt Rs.300 is received in the ordinary course of business. Capital expenditure as it reduces cost of production.
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ii. iii. iv. Solution i. ii. iii. iv.

Rs.2,500 spent on purchasing a tyre for their lorry. They had old machinery of value Rs.10,000 was sold for Rs.9,500. They received Rs.5000 towards dividend form their investments in shares. They were able to sell cotton T shirts ( cost Rs. 1,200 ) for Rs.1,500. Rs.600 was spent on alteration of a machinery in order to reduce power consumption.

Deferred revenue expenditure benefit likely to be enjoyed for more than one year Capital expenditure- amount is spent to bring the asset into use. Deferred revenue expenditure the benefit can be spread for more than one year Revenue expenditure- spent for the normal functioning of the firm

QUESTIONS
I. Objective Type

a) Fill in the blanks: 1. 2. 3. Amount spent on acquiring a copy right is an example for _________. Capital expenditure is _________ in nature. Revenue transactions can be _________ or _________.
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iii. iv. v.

4. 5.

Depreciation on fixed asset is a _________ expenditure. Expenses on research and development will be classified under _________.

6.

Expenses on advertisement will be classified under a) capital expenditure b) revenue expenditure c) deferred revenue expenditure An plant worth Rs.8,000 is sold for 8,500 the capital receipt amounts to a) Rs. 8,000 b) Rs. 8,500 c) Rs. 500 Revenue expenditure is intended to benefit. a) subsequent year b) previous year c) current year An asset worth Rs.1,00,000 is sold for Rs.85,000 the capital loss amounts to a) Rs. 85,000 b) Rs. 1,00,000 c) Rs. 15,000

[Answers : 1. capital expenditure, 2. non-recurring, 3. revenue expenditure, revenue receipt, 4. revenue expenditure, 5.deferred revenue expenditure. b) Choose the correct answer: 1. Transaction which provide benefit to the business for more than one year is called as a) capital transaction b) revenue transaction c) neither of the two. Amount spent on remodelling an old car is example of a) deferred revenue expenditure b) revenue expenditure c) capital expenditure Shankar introduces Rs.50,000 as additional capital in the business. This amount will be considered as __________. a) capital receipt b) revenue receipt c) both Revenue receipts are ___________ in the business. a) non-recurring b) recurring c) neither of the above. Venkatesh purchases goods worth Rs.80,000 for the purpose of selling. This amount will be treated as a) capital expenditure b) revenue expenditure c) deferred revenue expenditure
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7.

8.

9.

2.

3.

10. The net loss which arises in a business is an example of a) revenue loss b) capital loss c) neither of the two [Answers : 1. (a), 2. (c), 3. (a), 4. (b), 5. (b), 6. (c), 7. (b), 8. (c), 9. (c), 10. (a)]
II. Other Questions:

4.

5.

1. 2. 3. 4. 5. 6.

Write the characteristics of Capital Expenditure. What is a revenue expenditure? Write a note on deferred revenue expenditure. Differenciate Capital, Revenue & Deferred revnue expenditure. What are Capital profits? What is revenue loss?
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III. Problems:

1.

Classify the following into capital and revenue i. ii. iii. iv. v. Rs.560 spent on replacement of a worn our part of a plant Rs.1,500 spent on complete overhauling of a second hand machinery just bought. Carriage expenses Rs.230 Profit on sale of asset Rs.700 Rs.250 loss on sale of furniture

iv. v.

Cost of Rs.1,00,000 on building a godown. Purchased land for Rs.1,00,000.

[Answers : Capital expenditure(iv), (v); Revenue expenditure (i), (ii), (iii)] 4. Classify the following expenses into Capital and revenue. i. registration expenses incurred for the purchase of land. ii. repairing charges paid for remodelling the purchased old building. iii. profit earned on the sale of old furniture. [Answers : Capital expenditure (i), (ii); Capital profit (iii)] 5. State whether the following are capital or revenue i. repairs made on second hand plant purchased ii. wages paid to workmen for setting up a new plant iii. replacement of old furniture iv. salary paid to staff v. amount received as rent during the year for letting out a portion on sub rent [Answers : Capital expenditure (i), (ii), (iii); Revenue receipts (v); Revenue expenditure (iv)] 6. Classify as capital and revenue i. carriage paid on goods purchased ii. legal expenses paid for raising of loans iii. cost of maintenance of building iv. investments costing Rs 40,000 were purchased a few years back, were sold for Rs 50,000 v. annual white washing charges amounted to Rs 1,000 [Answers : Capital expenditure (ii); Revenue expenditure (i), (iii), (v); Capital profit (iv)]
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[Answers : Capital expenditure (i), (ii); Revenue expenditure (iii); Capital profit (iv); Capital loss (v)] 2. Raju gives you the following expenses which were incurred in his business during the year 2003, classify them into capital,revenue or deferred revenue i. ii. iii. iv. v. Rs.12,000 spent on purchasing a patent right Freight charges paid on new plant amounts to Rs.700 Repairs of Rs.575 for furniture Rs.5,000 spent towards expenses connected with rain water harvesting as per Government orders Rs.7,500 spent towadrs initial advertsing expenses

[Answers : Capital expenditure(i), (ii), (iv); Revenue expenditure (iii); Deferred revenue expenditure (v)] 3. Vasudevan gives you the following transactions in his business, classify into capital or revenue i. ii. iii. Purchases of goods worth Rs.7,000 for the purpose of selling. Rs.1200 fire insurance for the building for business. Renewal of magazine subscription fee Rs.75.
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