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Regular Study - Capital and Revenue Expenditure/Receipts

Capital and Revenue Expenditure/Receipts

A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost (except for the cost of land) will then be charged to depreciation expense over the useful life of the asset.

A revenue expenditure is an amount that is expensed immediately—thereby being matched with revenues of the current accounting period. Routine repairs are revenue expenditures because they are charged directly to an account such as Repairs and Maintenance Expense. Even significant repairs that do not extend the life of the asset or do not improve the asset (the repairs merely return the asset back to its previous condition) are revenue expenditures.

Difference between Capital and Revenue Expenditure

CAPITAL	REVENUE
Large amount	Relatively small
Improve or enhance earning capacity	Maintain asset
Long duration benefit	Short duration
Non- recurring	Recurring
Balance sheet item	Trading /P & L A/c item

Capital Receipt

Capital receipts are the income received by the company which is non recurring in nature. They are generally part of financing and investing activities rather than operating activities. The capital receipts either reduces an asset or increases a liability. The receipts can be generated from the following sources:

Issue of Shares
Issue of debt instruments such as debentures.
Loan taken from a bank or financial institution.
Government grants.
Insurance Claim.
Additional capital introduced by the proprietor.

Revenue Receipt

Revenue Receipts are the receipts which arises through the core business activities. These receipts are a part of normal business operations that is why they occur again and again however its benefit can be enjoyed only in the current accounting year as its effect is short term. The income received from the day to day activities of business includes all the operations that bring cash into the business like:

Revenue generated from the sale of inventory
Services Rendered
Discount Received from the creditors or suppliers
Sale of waste material/scrap.
Interest Received
Receipt in the form of dividend
Rent Received

Key Differences Between Capital Receipt and Revenue Receipt

Receipts generated from investing and financing activities are capital receipts, on the other hand, receipts from operating activities are revenue receipt.

Capital Receipts do not occur frequently as opposed to Revenue Receipts which do occur frequently.

The benefit of capital receipt can be enjoyed in more than one year but the benefit of revenue receipt can be enjoyed only in the current year.

Capital Receipts appears in the liabilities side of the Balance Sheet whereas Revenue Receipts appears in the credit side of the Profit and Loss Account.

Similarities

Both receipts are a part of business activities.
Both are important for the survival and growth of the company.
Source of business income.

Capital Receipts	Revenue Receipts
Receipts derived from sources which are not part of the normal trading activities of the business such as loans and capital injection by owners	Receipts related to normal activities of the business, such as sales of goods and that are added to Gross Profit
Example of capital receipts in a business Capital paid by partners, or in case of a joint stock company, sums received from shareholders or debenture holders Loan Income from the sale of assets Example of capital receipts by clubs and societies Entrance fees Donations received for the purpose of purchasing a new assets or improving an existing asset Legacies	Example of revenue receipts in a business Sales Discount received Commission received Rent received Interest received, etc Example of capital receipts by clubs and societies Annual subscriptions Donations Gains from sale of an asset
Appear as capital or liabilities in the Balance Sheet	As revenue to Trading and Profit and Loss Account

Capital and Revenue Expenditure : Examples

Cost of replacement of defective parts of the machinery is ……

Capital expenditure
Revenue expenditure
Deferred revenue expenditure

Loss of goods due to fire Rs.8000 is a revenue expenditure because……

It is recurring
Amount involved is small
Loss is arising out of business operations

Preliminary expenses , discount allowed on issue of shares are the examples of

Capital expenditure
Deferred revenue expenditure
Revenue expenditure

Expenditure incurred in acquiring the patents rights for the business is an example of ----

Capital expenditure
Deferred revenue expenditure
Revenue expenditure

S.No	Item of Expenditure	Nature	Reason for Classification
1.	Expenses on a Foreign Tour to purchase a machinery	Capital	These are incurred to acquire a capital asset
2.	Cost of Machinery Purchased	Capital	These are to acquire a capital asset
3.	Insurance & Freight on Machinery purchased	Capital	These are incurred to acquire a capital asset.
4.	Custom Duty on Imported Machinery	Capital	These are incurred to acquire a capital asset
5.	Wages for erection of Machinery	Capital	These are incurred to put the Capital Asset to use.
6.	Installation Charges of a Machinery Purchased	Capital	These are incurred to put the capital asset to
7.	Expenses incurred on trial before the asset is put	Capital	These are incurred Run to use
8.	Cost of a Second hand Machinery Purchased	Capital	These are incurred to acquire a capital asset.
9.	Repair of a second hand machinery before put to use	Capital	These are incurred to put the capital asset to use
10.	Interest on a term loan for the purchase of machinery. The commercial production has not begun till the last day of the accounting year.	Capital	These are incurred to acquire capital asset & the commercial production has not yet begun.
11.	Interest on a term-loan for the purchase of machinery. The commercial production has already begun.	Revenue	The commercial production has already begun.
12.	Repairs of Machine after the machine is put to use	Revenue	These are incurred to maintain the capital asset
13.	Amount spent for replacement of worn out part of machine	Revenue	These are incurred to maintain the capital asset.
14.	Annual Maintenance fee of a machine	Revenue	These are incurred to maintain the capital asset.
15.	Money spent to reduce working expenses	Capital	These are incurred to acquire long term benefits.
16.	Amount spent for replacement of a petrol driven origin by CNG Kits	Capital	These are incurred to reduce the operating costs and thereby increasing the profits
17.	Cost of Rings & Pistons of an engine changed to get fuel efficiency	Capital	These are incurred to reduce the operating costs and thereby increasing the profits
18.	Overhauling expenses for the engine of a motor car to get better fuel efficiency	Capital	These are incurred to reduce the operating costs and there by increasing the profits
19.	Legal expenses to acquire a building	Capital	These are incurred to acquire ownership rights of the capital asset.
20	Legal Expenses to defend a suit claiming that firm’s factory site belongs to plaintiff	Revenue	These are incurred to maintain the capital asset.
21.	Amount spent on repainting an old building for the first time on purchase	Capital	These are incurred to put the capital assets to use.
22.	Amount spent on annual repainting of building	Revenue	These are incurred to maintain the capital asset.
23.	Expenses to obtain a license for starting a factory	Capital	These are incurred to maintain the capital asset. (i.e. right to carry on business)
24.	Annual Renewal fee of Licence for next year	Revenue	These are incurred for the construction of building and hence to be capitalized with the cost of building
25.	Amount spent for the construction of temporary huts for storing building material while constructing a building	Capital	These are incurred for the construction of building and hence to be capitalized with the cost of building
26.	Deposit with Mahanagar Telephone Nigam Ltd. for installing telephone.	Capital	The amount us adjusted over a period of time against telephone bills.
27.	Expenses for removal of stock to a new site	Revenue	Such expenditure in neither bringing enduring benefit nor enhancing the value of capital asset.
28.	Fines Imposed	Revenue	Such expenditure is neither bringing enduring benefit nor enhancing the value of capital asset.
29.	Annual Fire Insurance Rs. 12,000 paid on 1stJanuary 2006 during accounting year ending on 31.3.2006	Revenue	Rs. 3,000 as current year’s revenue expenses Rs. 9,000 as prepaid expenses for next year.
30.	Inauguration Expense on opening of a new branch of an existing business Free gift to customers Or Tournament Sponsoring Exp. Or Advertisement campaign to lunch a new product.	Deferred Revenue	Such expenditure is not enhancing value of capital asset. Since it has an enduring effect on the future revenue generating capability of business, it may be treated deferred revenue expenses.
31.	Compensation for breach of stock to a new site	Revenue	Such expenditure in neither benefit nor enhancing the value of capital asset.
32.	Compensation paid to workers under Voluntary Retirement Scheme (VRS)	Revenue	Such expenditure is not enhancing value of capital asset. Having regarded to the large amount, it may be better to treat it as deferred revenue expenditure which may be w/o of over future years.
33.	Amount spent on demolition of Building to construct bigger building on the same site	Capital	These are incurred for the construction of new building
34.	Loss Sale of Machine	Revenue	Such expenditure is neither brining enduring benefit nor enhancing the value of capital asset.
35.	Legal Expenses to recover dues from customers	Revenue	These are incurred to maintain present revenue generating capability
36.	Festival Advance to employees	Not an Exp.	It is an item of loan & advances
37.	Advance to Suppliers of Goods	Not an exp.	It is an item of loan & advances.
38.	Cost of Improvement in Electric wiring system	Capital	This is incurred to acquire capital asset.
39.	Purchase of a Patent Right	Capital	This is incurred to acquire capital asset.
40.	Purchase of a Goodwill	Capital	This is incurred to acquire capital asset.
41.	Purchase of a Technical Know how	Capital	This is incurred to acquire capital asset.
42.	Purchase of a Live Stock by a farmer	Capital	This is incurred to acquire capital asset.
43.	Amount spent on Neon Sign Board	Capital	This is incurred to acquire capital asset.
44.	Import Duty on purchase of Materials	Revenue	This is incurred on operating activities in the normal course of business.
45.	Compensation paid to employees who were retireched	Revenue	Such expenditure is neither bringing enduring benefit nor enhancing the value of capital asset.
46.	Imported Goods forfeited by custom authorities	Revenue Loss	Such expenditure is neither bringing enduring benefit nor enhancing the value of capital asset.

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