The Going Concern Assumption allows the accountant to classify the expenditure as Capital Expenditures and Revenue Expenditures, capital receipts and capital revenues. This distinction between capital and revenue nature of the items is necessary in order to find out the correct profit or loss during the year and also to ascertain the true and fair position of the business.
The Distinction between Capital Revenues and Capital Expenditures
Capital Expenditure is that expenditure which we incur for acquiring or bringing into existence an asset, for extending or improving the fixed asset or for substantial replacement of an existing fixed asset,
In other words, we can say that the amount which a company spends for possessing any long-term capital asset or to enhance the working capacity of an existing capital asset, or to increase its lifespan to generate future cash flows is known as Capital expenditure. Capitalization of expenditure means that we disperse the amount of expenditure over to the remaining useful life of the asset.
It is a long-term investment by the company, in the name of assets, to create financial gain for the years to come. Examples of capital expenditures include the cost of land and building, plant and machinery, furniture and fixtures, etc. Such capital expenditures normally yield benefits which extend beyond the current accounting year.
Browse more Topics under Financial Statements
- An Introduction to Financial Statements
- Operating Profit
- Trading and Profit and Loss Account
- Balance Sheet and Opening Entry
- Stakeholders and their Information Requirement
- Depreciation, Bad Debts and Provision for Bad and Doubtful Debts
- Need for Adjustment, Closing Stock and Outstanding Expenses
- Prepaid Expenses, Accrued Income and Income Received in Advanced
- Provision for Discount on Debtors, Managers Commission and Interest on Capital
- Manufacturing Account
Revenue Expenditure is that expenditure which a firm incurs for maintaining the productivity or earning capacity of a business. In other words, we need to incur it on a regular basis for conducting the operational activities of the business. As per Accrual Accounting Assumption, we recognize revenues when we receive or earn them. Whereas, we recognize expenses when we incur them. Therefore, we charge them to the Income Statement as and when they occur. This satisfies Matching Principle in which we record the expenses in the period of their incurrence.
Examples of revenue expenditure are –office and administration expenses, Wages & Salary, Printing & Stationery, Electricity Expenses, Repairs and Maintenance Expenses, Postage, Insurance, taxes, travel expenses, etc. Some Non-operating expenses and losses such as interest on loan taken, loss by theft, etc. The revenue expenditure generates benefits for the current accounting year.
Capital Receipts are those receipts which are non-recurring in nature and generate benefits for many years in the future. We show these receipts on the liabilities side of the balance sheet. Examples of capital receipts are the sale of fixed assets, capital contribution, loan receipts, a loan from bank etc.
Revenue receipts are those receipts which are recurring in nature and are available to meet day to day expenses of the business. We show these receipts on the credit side of profit and loss account. Its effect is nil i.e., it neither increases nor decreases the value of asset or liability.
Examples of Revenue Receipts are the sale of stock-in-trade, revenue from services rendered in the normal course of business, revenue from permitting others to use the assets of the enterprise, such as interest, rent, loyalty, etc.
Difference Between Capital Revenues (Receipt) and Capital Expenditure:
|Basis for comparison
|Capital revenues are a non-recurring incoming cash flow into the business that leads to the creation of liability and a decrease in company assets.
|Capital expenditure is the expenditure that is incurred in acquiring a capital asset or improving the capacity of an existing one, resulting in the extension in its life years.
|Capital revenues effect is long Term.
|Its effect is Long Term.
|We show Capital revenues in the Balance Sheet on the liability side.
|We show the Capital expenditures in the Income Statement & Balance Sheet
|These are non-recurring in nature.
|These are Non-recurring in nature.
|Its benefit is enjoyed for many years in the future.
|Its benefit is received for more than one year
|Increase in value of assets
|It decreases the value of asset or we can say that it increases the value of the liability.
|It increases the value of assets.
|Sale of the fixed asset, loan taken from bank etc.
|Cost of land and building, furniture and fixtures etc.
Solved Example for You
Q: Find out the nature of expenditure and revenue. Also, give appropriate reasons.
- Expenses on foreign tour for purchasing new machinery.
- ₹ 2,000 spent to remove a worn out part and replace it with the new engine.
- ‘A’ gave one of his offices on rent.
- A petrol-driven engine of a passenger bus was replaced by a diesel engine.
- The expenses of ₹ 5,000 on repainting the factory.
- The new partner brings a capital of ₹ 50,000.
- Interest on loan for the purchase of machinery. The commercial production for which has not begun till the last day of the accounting year.
- Interest on loan for the purchase of machinery. The commercial production for which has already begun.
- Since the business incurs this expenditure up to the point the machine is ready to use, it represents capital expenditure.
- It is a revenue expenditure since the firm incurs it to keep the asset in working order.
- This is a revenue receipt because it is not helping business.
- It is a capital expenditure since it will increase the earning capacity of the business by lowering the costs.
- It is a revenue expenditure since it helps in maintaining the factory in good condition.
- Capital brought by a new partner is a capital receipt.
- Such expenditure should be treated as capital expenditure since the commercial production has not begun till the last day of the accounting year.
- Such expenditure should be treated as capital revenues expenditure since commercial production has already begun.