CAPITAL, REVENUE AND DEFERRED REVENUE EXPENDITURE & RECEIPT INTRODUCTION: The distinction between Capital & Revenue

is significant in the accounting, It directly affects the correctness of the amount of profit or loss made by the firm during a given period. It also affects the truthfulness of the financial position of the firm on any given date. The distinction between Capital and Revenue is connected with the Matching of Cost and Revenues. This concept requires matching relating the expired cost i.e., the expenses incurred for a period, with revenue earned for the same period, The process involves two steps: 1. Ascertain the revenue earned for a given accounting period and 2. Determine expenses incurred to earn that revenue. The distinction between capital and revenue is relevant for both the steps. Certain receipts are not income. E.g. Sale proceeds of obsolete assets, Recovery of loan, Capital brought by businessmen.

ALL RECEIPTS ARE NOT INCOME These receipts are not credited to Profit & Loss Account THESE ARE CAPITAL RECEIPTS There are certain payments, which do not represent expenses for the year e.g. Purchase of asset, Payment for Liability, etc. ALL PAYMENTS ARE NOT EXPENSES These payments are not debited to Profit and Loss Account THESE ARE CAPITAL EXPENDITURE The distinction between capital and revenue becomes important from the point of preparation of final accounts viz. profit and loss account and balance sheet. All items appearing in the trial balance are taken either to trading and profit and loss account or balance sheet. All revenue expenditure and receipts are taken to the trading and profit and loss account, while all capital expenditure and receipts are taken to the balance sheet. Therefore it becomes necessary that each item of expenditure and receipt must be placed at appropriately in the financial statements. CAPITAL EXPENDITURE:

Capital expenditure is that expenditure the benefit of which is enjoyed or consumed not in one year only but over many years. It is the expenditure, which results in purchase of assets, which may be useful for many years. The purpose of incurring such expenditure is to earn income over a period of year. Capital expenditure is one, which is incurred for the following purpose:1. Purchase of assets for business for earning profit 2. Expenditure incurred to put to use the old asset purchased. 3. Expenditure incurred to put to use the New asset purchased. 4. Expenditure incurred on extension to or improvement of an assets to produce more, to improve its revenue earning capacity. 5. Expenditure incurred for increasing the life of assets. 6. Expenditure incurred for acquiring the right to carry business. It is generally observed that : 1. Larger amount of expenditure. 2. Gives benefit for the larger period 3. Improves in earning capacity 4. Non-recurring in nature 5. Put assets to use

6.

Shown in the balance sheet.

REVENUE EXPENDITURE: Any expenditure which is not a capital expenditure and which is incurred for carrying the day-to-day business activities is called revenue expenditure. Such expenditure may be incurred for maintaining the fixed assets in the working condition. The benefit of such expenditure is for a short period, in any case not more than one year. 1. The amount spent is relatively small, but not always. 2. The purpose is to maintain business, or assets in usable/working condition. 3. The benefit of such expenditure is exhausted in a short period, in any case not more than one year. 4. The expenditure is recurring in nature i.e. arises again and again. 5. It is shown in Profit and Loss Account. DEFERRED REVENUE EXPENDITURE: All expenditure incurred for carrying on the normal business activity is known as revenue expenditure. The benefit of such expenditure is enjoyed in the year in which it is incurred. But sometimes, heavy revenue expenditure is incurred in one year but the

benefit of it may be enjoyed not only in one year but in the following two or more years. Deferred Revenue Expenditure is that expenditure for which payment has been made or a liability incurred but which is carried forward on the presumption that it will be of benefit over a subsequent period or periods. These are of Quasi Capital in nature BENEFIT IS NOT EXHAUSTED IN ONE ACCOUNTING YEAR Those revenue expenses the writing of which is deferred (postponed) to more than one year 1. Those expenses which are wholly paid in advance. 2. Those expenses the benefit of which is partly received during the year under consideration and partly in subsequent year. A part of such expenditure will be charged against profit of the year and the balance will be carried forward ( and shown in the balance sheet), for write off in subsequent years. These expenses are incurred very rarely. Such expenses do not create any asset or infrastructure. These are not treated as expenses for the year in which they are incurred, but spread over a number of years till the benefit is not exhausted. They are

not normal day to day expenses of the year which can be absorbed against the revenue of one year. CAPITAL AND REVENUE RECEIPT: Any receipt on capital account is a capital receipt and any receipt on revenue account is a revenue receipt. A capital receipt is disclosed in the balance sheet while a revenue receipt appears in the trading and profit and loss account. Thus, any receipt in the ordinary course of the business, which is a regular source of income, is a revenue receipt. E.g. Sale of goods, receipt of interest and dividend income, rent received, commission received and discounts earned. Receipts like Loans from banks and relatives, capital contributed by the partner, a lottery prize, and sale of old assets are the examples of capital receipts. However, here also, at times the distinction is very thin. Facts and circumstances of each case will decide the issue. A sale of machinery will be a capital receipt for a manufacturing company using that machine as a fixed asset, but, will be a revenue receipt for a machinery dealer.

State giving reasons, whether you will consider the following items as capital, revenue, or deferred revenue 1. Purchased old machinery Rs. 15000. 2. Spent Rs. 9,000 to re-condition the old machinery. 3. Spent Rs. 10,000 on preparation of sale deed in connection with purchase of building. Spent Rs 5,000 on custom duty, clearing charges on account of machinery imported. 4. Wages incurred to install the machinery Rs. 10,000. 5. Cost of air-conditioning the Executives Office Rs.15,000. 6. Cost of overhauling the machine Rs. 3,000. 7. Acquired goodwill. 8. Cost of training the employees 9. Cost of construction of a gallery in the office premises 10. Insurance of building re 11. Paid fees of the association for next 3 years 12. Payment of Municipal taxes re 13. Amount received on sale of old furniture capital receipt 14. Received a gift from father capital receipt 15. Bad debts recovered 16. Amount received on issue of debenture

17. License fees paid for carrying on the work of factory. 18. Renewal of a license. 19. Loss on sale of plant and machinery 20. Discount on issue of shares deferred revenue 21. Heavy Expenditure incurred on advertising.dfr 22. Legal expenses incurred in connection with issue of share capital. 23. Cost of dismantling removing and reinstalling plant by a sugar mill with a view to move the work to more suitable locality. 24. Spent for alteration of existing plant, which would effect reduction in cost of production. 25. Replaced petrol engine of a bus by a diesel engine. 26. Cost of conveyance in connection with a newly acquired furniture 27. Heavy legal expenses incurred by a newspaper company to defend a legal suit. 28. Cost of experimenting a chemical product which did not result in success. 29. Cost of improving sitting accommodation by a cinema house. 30. Cost of repainting and redecorating a cinema house

31. Travelling expenses of director for a trip abroad for purchasing a capital goods. 32. Brokerage and commission paid for raising capital. Deferred revenue 33. Amount used to repay loan 34. Depreciation on machinery 35. Interest on loan borrowed. 36. Goods destroyed by fire. 37. Compensation received for loss of goodwill. 38. Premium given for lease. 39. Shares purchased ex-dividend. 40. Claim received from Insurance Co. for loss of machine. 41. White washing of factory building. 42. Cost of market research for a new product. 43. Cost of removing stock 44. Cost of painting of a new factory. 45. Expenditure on uniforms to office staff. 46. Cost of designing a new product which did not come for commercialization. 47. Renovation expenses 48. Heavy current repairs to the roof of factory building. 49. Cost of acquisition of copy right. 50. Excise duty paid. 51. Purchase of wine and spirits. 52. Cost of arranging a mortgage.

53. Commission on issue of debentures. 54. Repairs necessitated by negligence. 55. Cost of leveling of land purchased for business use. 56. Legal expenses in an income tax appeal.