16 Capital and Revenue Items

Learning Objectives:-

To classify and know the distinctions between- 

• Revenue Item, 

• Capital Item , and 

• Deferred Revenue Item. 

Tit Bits 

- All capital expenditures and receipts are taken to the Balance Sheet. 

- All revenue expenditures and receipts are taken to Trading Account / Profit and Loss Account. 

Capital Expenditure 

• Capital Expenditure that results in acquisition of permanent assets.

• Such assets are to be used in the business to earn revenue.

Capital Expenditure - 

• Increases quantity of fixed assets / 

• Increases quality of fixed assets / 

• Results in replacement of assets. 

Examples: 

- Expenses incurred in relation to acquisition of a fixed asset

- Expenses incurred to bring the fixed asset in to working condition

        (Installation Wages / Carriage / Repair Charges for Second Hand Assets etc.) 

Revenue Expenditure

• The amount that is spent to earn revenue is called as 'Revenue Expenditure'.

• These are incurred in the regular conduct of the business. 

• Expenses that are done to retain the earning capacity / working condition of an asset can also be regarded as 'Revenue Expenditure'.

Examples

- Depreciation of fixed assets, 

- Interest on borrowings, 

- Cost of goods purchased for resale etc. 

Deferred Revenue Expenditure 

• If the benefit for an expenditure is spread over a number of years, it is called as 'Deferred Revenue Expenditure'.

• It will be shown on the Assets Side of the Balance Sheet under the heading 'Miscellaneous Expenditure'. 

Characteristics:

a) Benefit is enjoyed for more than one year. 

b) Non Recurring in nature 

Examples:

- Expenses done for Research and Development of a new product or service

- Abnormal Loss arising out of fire or lightning (uninsured)

- Bulk amount spent on advertising

Revenue Receipts 

• Receipts obtained in normal course or conduct of a business are called as 'Revenue Receipts'. 

Examples :

- Receipts from sale of goods

- Commission received

- Interest Received etc. 

Capital Receipts 

• Receipts which are not received in the normal course or conduct of the business activity are called as 'Capital Receipts'.

Examples:

- Receipts from sale of investments / fixed assets 

- Receipts on account of secured / unsecured loans etc. 

Capital Loss

• Loss that do not arise in the regular course of the business is known as 'Capital Loss'.

Example: 

- Loss on sale of a fixed asset or investment 

Revenue Loss 

• Losses that arise in the normal course of the business are called as 'Revenue Loss'.

• Excess of revenue expenditure over revenue receipts may be called as 'Revenue Loss'. 

Distinctions between Capital Expenditure and Revenue Expenditure:

Tit Bits

Even if the expenditure doesn't increase the productive capacity of an asset, it may be capitalized if it increases the asset's value.



For Case studies Please have a look on - Case Studies of Capital and Revenue Items