Capital & Revenue T

Capital & Revenue Every business transactions effect to business for long term or short term. Transactions may be divided into two types according to their nature. If transaction have long term effect are called “capital transaction” and if transaction have short-term effect are called “Revenue transaction”.

Capital & Revenue We can also say, transaction that effect only one accounting period is called revenue transaction or transaction which benefit is received within one year is called “Revenue transaction” and if any transaction effect more than one accounting periods or transaction which benefit is received more than one year is called “Capital transaction”.

Capital Transaction Capital transaction divided into two types: Capital Expenditures Capital Receipts

Capital Transaction Capital expenditure is made when a firm spends money either to: Buy fixed assets For making improvement and extension to the fixed assets e.g addition to Building. Acquiring fixed assets Legal costs of buying building

Capital Transaction Carriage inwards on machinery bought Any other cost needed to get the fixed asset ready for use. For raising capital monies of the business such as brokerage paid for arranging loan, underwriting commission etc. Architects fees for building plans and for supervising construction of buildings:

Examples of Capital Expenditure Purchase of furniture, motor vehicles, electric motors, office equipment, loose tools and other tangible assets. Cost of acquiring intangible assets like goodwill, patents, copy rights, trade marks, patterns and designs etc. Addition or extension of assets. Money spent on installation and erection of plant and machinery and other fixed assets.

Examples of Capital Expenditure Legal expenses on raising loans for the purchase of fixed assets. Interest on loan and capital during the construction period. Money spent to bring a second-hand asset into working condition. Cost of replacing factory building from an old place to a new arid better site. Premium given for a lease.

Examples of Capital Expenditure Wages paid for the construction of building. Structural improvements or alterations in fixed assets resulting in an increase in their useful life or profit earning capacity. Cost of issue of shares and debentures (certain expenditures are incurred by the companies when share and debentures are issued).

Capital Receipts Receipts refers to the actual amount of Cash received. Capital Receipts include the following:- Money borrowed form partners, bankers, private institution / individuals etc. Money received by the sale of fixed assets. Money received on account of capital profit.

Revenue Transaction Revenue transactions also divided into two types: Revenue Expenditures Revenue Receipts

Revenue Expenditure Expenditure which is not for increasing the value of fixed assets, but for running the business on a day to day basis, is known as revenue expenditure. It is for shorter period of time and the benefit of this expenditure is for one or less than one year.

Revenue Expenditure Expenditure for purchasing of floating assets i.e assets meant for resale at profit or for being converted into saleable goods. Expenditure incurred by maintaining fixed assets in proper working order i.e repair to plant & machinery, depreciation and renewals. Expenditure for meeting day to day expenses of carrying on a business.

Revenue Receipts Receipts refer to the actual amount of cash received. Revenue Receipts include the followings. Money received by the sale of floating assets- by the sale of goods. Money received on account of some revenue profit.

Example of Revenue Expenditures Wages paid to factory workers. Repair and maintenance expenses incurred on fixed assets. Cost of saleable goods. Depreciation of fixed assets used in the business. Freight, cartage, octroi duty, transportation, insurance paid on saleable goods.

Example of Revenue Expenditures 5).Expenditure incurred in the ordinary conduct and administration of business, i.e. rent, , carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.

Self Correction Problem Classify which of the following is capital or revenue with reasons Carriage paid on purchase of machinery. Carriage paid on merchandises purchased. Old machinery was repaired at cost of Rs.500.

Self Correction Problem Cost of extension a Banquet hall. Wages paid for installation of machinery. Amount realized from sale of old furniture.

Self Correction Problem A motor car, whose book value is Rs. 100,000 was sold for Rs.85,000. Rs. 200,000 received from sales of Building which had cost Rs.180,000.

SOLUTION No Name of Items Reasons 1 Capital Expenditure This expenditure is considered as part of cost of machinery, so it is called capital expenditure. 2 Revenue Expense This is revenue expense because merchandises are purchased for resale purpose and it is rotten activity of business. 3 Revenue Expenditure This expenditure is done for proper working condition of machinery. 4 This expenditure is done for proper working condition of motor car.

SOLUTION 5 Capital Expenditure Because from this expenditure increase the capacity of hall, so this expenditure called capital expenditure. 6 Capital Expenditure. This expenditure is considered as part of cost of machinery, so it is called capital expenditure. 7 Capital Receipts. When furniture was purchased the cost of furniture consider as capital expenditure, so furniture will be sold proceed consider as capital receipts.

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