Financial Accounting I FYBAF SEM I

CAPITAL AND REVENUE:EXPENDITURE AND RECEIPTS NOTES: 1. Accounting records business, investment and trading activities: Accounting is the recording and reporting of business transactions. Business transactions involve activities of actual business, investment and financing. 2. Business activities give rise to revenue in come & revenue expenditure Business covers all activities carried out to earn profits. Business activities of trading, manufacturing and services give rise to revenue receipts and revenue expenditure.

3. Investment activities give rise to capital expenditure: In order to produce goods, a manufacturer must invest in machinery, factory, etc. such machinery, factory buildings etc. are called assets. 4. Financing activities give rise to capital receipts: Capital means the money put in the business by the owner. Capital also includes the goods or assets brought in the business by the owner. If his own money is not enough, the businessman has to borrow money from banks etc. such loans, which must be paid back sometime in future, are called liabilities. Obtaining money through capital and loans capital receipts and is known as financing activity.

CAPITAL EXPENDITURE: Eric Kohler has defined capital expenditure as “expenditure intended to benefit future periods: An addition to fixed assets. The term is generally restricted to expenditure that add fixed assets units or that have the effect of increasing the capacity, efficiency, life span or economy of operation of an existing asset.

CHARACTERISTICS 1. Long-term benefits 2. Investing activity 3. Recoverable 4. non-recurring 5. effect on funds & profits 6. disclosure in final A/c

REVENUE EXPENDITURE: Eric kohler has defined revenue expenditure as “an expenditure changed against operation; a term used to contrast with capital expenditure. Revenue expenditure, as opposed to capital expenditure, has no future benefits. The items of expenditure having immediate or short-term benefits are treated as revenue expenditure.

CHARACTRISTICS 1. business activity 2. maintain assets 3. not recoverable 4. Recurring 5. Reduces funds and profits

CAPITAL RECEIPTS: capital receipts means an amount received by a course of its financing activity (obtaining money as capital or loan or sale of assets). Capital receipts are non-recurring in nature.

REVENUE RECEIPTS revenue receipts means the receipts from customers for sale of goods, for services given, or for use of finds or use of assets.

REVENUE RECEIPTS VS. CAPIATAL RECEIPTS: No. Revenue receipts (RR) Capital receipts 1 2 3 4 5 6 RR pertains to business activity. Examples are RR from sale of goods, fees, interest, dividend, royalty. RR pertaining to current year is shown as income in P&L a/c; RR pertaining to future period is shown as liability in balance sheet. RR need not be returned/refunded. RR is recurring in nature. RR increases profits and funds CR pertains to financing activity. Examples are capital from owner, loans from bank etc. CR is shown as liability in balance sheet. CR may be returned back. CR is non-recurring in nature. CR increases funds available for investment, but may reduce profits as interest is to be paid on loans obtained.

REVENUE EXPENDITURE VS. CAPIATAL EXPENDITURE: NO. REVENUE EXPENDITURE (RE) CAPIATAL EXPENDITURE (CE) 1 REpertains to business activity. CE pertains to investing activity. 2 RE helps to run a business. CE helps to set up and develop a business. 3 RE helps to maintain an assets. CE helps to acquire new assets. 4 Examples are RE for purchase of goods, fees paid etc. Examples are fixed assets like machines, investment in shares. 5 RE pertaining to current year is shown as expenses in P&L a/c; RE pertaining to future period is shown as assets in balance sheet. CE is shown as assets in balance sheet. 6 Money on RE is irretrievably gone. It cannot be recovered. Money on CE may come back on sale of assets or investment. 7 8 RE is recurring in nature. RE reduces both funds and profits of the current year. CE is non-recurring in nature CE decreases funds but may increase profits in future from use of assets/interest earned on investment etc.