A transaction refers to the exchange of an asset and discharge of liabilities for consideration in terms of money. However, these transactions are of two types, viz. Capital transactions and Revenue transactions. Let us now discuss these in detail here.
Capital and Revenue Transactions
In order to correctly determine the accounting profit for a period the concept of capital and revenue is of utmost importance. The bifurcation of the transactions between capital and revenue is also necessary for the recognition of business assets at the end of the accounting or financial year.
Capital transactions are transactions that have a long-term effect on the business. It means that the effect of these transactions extends to a period of more than one year.
Revenue transactions are transactions that have a short-term effect on the business. Usually, the effect of these transactions is only for a period of one year.
Capital expenditure is the expenditure that a business incurs on the purchase, alteration or the improvement of fixed assets. For example, the purchase of furniture for office use is a capital expenditure. The following costs are included in the capital expenditure:
- Delivery charges of fixed assets
- Installation expenses of fixed assets
- Alteration or improvement expenses of fixed assets
- Legal costs of purchasing a fixed asset
- Demolition costs of fixed assets
- Architects fee
4. Revenue Expenditure
The expenditure incurred in the running or the management of the business is known as the revenue expenditure. For example, the cost of the repairs of machinery is a revenue expenditure.
We need to show the Capital expenditure on the Assets side of the Balance Sheet while we show the Revenue expenditure on the debit side of the Trading and Profit and Loss Account.
The revenue receipt is the amount received by a business against the revenue incomes.
It is the amount which is received against the capital income by a business.
Capital profit refers to the profit that is earned on the sale of fixed assets.
Revenue profit is the profit which a business earns during the ordinary course of business.
It is the amount of loss that a business incurs on the sale of fixed assets.
It is the amount of loss that a business incurs during the ordinary course of business.
Rules for Determination of Capital Expenditure
The following expenses are termed as Capital expenditure:
- Any expenditure on the purchase of fixed assets or long-term assets for use in business in order to earn profits is capital expenditure. However, expenditure on fixed assets purchased for resale does not amount to capital expenditure.
- Any expenditure on the improvement or alteration in the present condition of a fixed asset to bring it to the working condition is a capital expenditure and thus we need to add it to the cost of the asset.
- Any expenditure of any sort which increases the earning capacity of the business is also capital expenditure.
- Preliminary expenses incurred before the commencement of business are also capital expenditure.
Rules for Determination of Revenue Expenditure
The following expenses are termed as the revenue expenditure:
- Any expenditure for the day-to-day conduct of the business is revenue expenditure. The benefits of these expenses last only for the period of one year.
- Any expenditure on the consumable items and on goods and services.
- Any expenditure on the maintenance of fixed assets such as repairs and renewals.
Deferred Revenue Expenditure
Deferred revenue expenditure refers to the expenditure which is revenue in nature but involves a lump sum amount and the benefits that extend for a period of more than one year. We need to write off these expenses over a period of 3 to 5 years. On the other hand, the balance which is not written off is carried forward and shown on the Assets side of the Balance Sheet. Heavy advertisement expenditure is a good example of such expenditure.
Questions on Revenue Transactions
Q. State whether the following are capital, revenue or deferred revenue expenditure?
- Purchase of new laptop for office use.
- Heavy advertisement expenses for launching a new product.
- Wages paid to machine operators.
- Installation expenses paid on machinery purchased.
- Capital expenditure
- Deferred revenue expenditure
- Revenue expenditure
- Capital expenditure