What Is Capital & Revenue - Expenditure, Receipts, Income

What Is Capital & Revenue - Expenditure, Receipts, Income

  • Classification of Expenditure
  • Classification of Revenue
  • Measurement of Income 
What Is Capital & Revenue
What Is Capital & Revenue 

(A) Capital Expenditure and Revenue Expenditure

Capital Expenditure

Capital Expenditure: Any expenditure that is incurred to purchase a permanent property or to increase its value is called capital expenditure. Therefore, the entire amount paid for purchasing land and buildings, plant and machinery, furniture etc. is called capital expenditure. Because you get benefit from capital expenditure for many years and these are written on the property side in the balance sheet. 

The Following Are Examples Of Capital Expenditure:-

I. Expenditure incurred in purchasing permanent properties such as land, buildings, plants, motor vehicles, trade marks etc. Such property will be used in business for many years.

II. Expenses incurred for the purchase or construction of any permanent property, such as for the manufacture of machines. Wages paid to laborers, freight paid to bring plant and machinery, expenditure incurred for complete renovation of old machines, etc.

III. Expense of expansion or improvement of permanent property which increases the profit-making capacity of these properties. Such as expenditure incurred to increase the number of seats in a cinema hall

IV. All expenditure incurred before the use of any property is considered as 'capital expenditure'. Therefore, the legal fees paid for purchasing a property and the interest paid for the period prior to its use on the brokerage and loan taken for the purchase of property are added to the 'cost of the property itself. But the interest paid for the period after the use of the property is considered to be the forward expenditure.

V. Expenditure incurred for the establishment of business, such as cost of patent, initial expenditure, reputation etc.

VI. Interest of capital till the time it is ready to start production or during the construction period of the company.

Revenue Expenditure

Profitable or Revenue Expenditure: Expenditures whose benefits will be received only in the current year are called forward expenses. Hence, all such expenses are written on the debit side of the business and profit and loss account. Such expenditure does not increase the profitability of the business, but it helps in maintaining the current profitability capacity of the business. The following are examples of proceeds:

I. Expenses of conducting the business day to day, such as construction expenses, office expenses, sales expenses, etc.

II. Expenses of general repair of permanent properties which do not increase their production power but are sustained are called as expenditure. Similarly, the expenditure incurred on the whitewash of the building is also an example of the expenditure incurred.

III. All payments made in respect of goods purchased for the purpose of re-sale.

IV. Loss on Fixed Assets/permanent properties.

V. Cost of raw materials purchased to change manufactured goods.

VI. Loan interest and capital interest for the period after the use of the property.

VII. Expenses to replace worn out parts of an existing machine.

VII. Loss from sale of permanent properties/Fixed Assets.

Difference Between Capital Expenditure And Income Expenditure:

I. Capital expenditure is incurred for purchasing or building a fixed asset while the proceeds are incurred for the day-to-day operations of the business.

II. Capital expenditures are incurred to increase the profitability of the business, while the proceeds are incurred to maintain the profitability capacity up to the present level, ie, to maintain the assets in an efficient state.

III. Capital expenditures often provide benefits for many years, while the maximum is only one year from future expenditures.

IV. Capital expenditures are written in the status statement while forward expenses are written in the business and profit and loss account.

Capital Receipts & Revenue Receipts

It is also very important to differentiate between capital receipts and proceeds receivables, because forward receipts go to the credit side of business and profit and loss and capital receipts either in the status statement as an increase of liabilities or a decrease in the value of assets. Are displayed.

Capital Receipts: The following are examples of capital receipts:

  1. Amount received from sale of fixed assets or appropriations.
  2. Capital raised by the owners or partners of the business or by the issue of shares and debentures in the case of the company.
  3. Amount received as loan.

Revenue Receipts:

  1. Amount received from sale of goods. 
  2. Commission and fees received for services rendered, Interest and dividends received on appropriations.

Income measurement

Methods of Measuring Income: Income can be measured by two methods:-

  • Comparison of net worth
  • Matching of proceeds and costs

Comparison of Networth: According to this method, the net worth of the end of the accounting period of an institution is compared to the net worth of the beginning of the accounting period. If there is an increase in net worth, the amount of increase is considered income and conversely, if there is a decrease in net worth, the decrease is considered a loss. The difference between the assets and liabilities of an organization is called net worth. For this purpose, there is no problem in the evaluation of liabilities, but the valuation of assets is a very complex task and it is very difficult to evaluate the assets correctly. Properties can be assessed by any of the following three methods:

  1. On historical cost basis
  2. Present, value of future income of assets
  3. Restoration cost basis

(i) Historical Cost Basis: This is the best method of valuing assets, but in this method there is difficulty in determining how much of the value of an asset is the cost of its service period. expired service) and how much is carried forward as unexpired cost for future period. Unspent cost is estimated based on the total productive life span of the property and the remaining life span. Estimating the productive life span of a property is a very difficult task and is based on personal judgment. Not only this, but future events such as technological development can prove the future life expectancy of the property to be wrong.

(ii) Present Value of future earnings of assets: Another method of valuation of assets is to calculate the present value of future income of assets. But the future income earning potential of the properties cannot be estimated accurately.

(iii) Replacement Cost Basis: Properties can also be valued on the basis of their restoration cost. But while the technology is constantly changing, it is very difficult to find the cost of re-installation of a machine with the same life span and productivity as before. Due to difficulties in valuing assets, the most popular method of income measurement is to compare (match) the proceeds of an accounting period with the cost of earning that proceeds.

(2) Matching of Revenues and Costs: According to this method, the income of an accounting period is determined by matching the proceeds and expenses incurred for that period. Hence, the first method (net price comparison method) of income measurement is based on the balance sheet statement and the second method (the proceeds and cost matching method) is based on the income statement. While determining income in this method, whatever costs related to the proceeds of any period should be charged from that proceeds. Therefore, in order to match the cost of the proceeds, one should first determine the proceeds and then the costs incurred for the realization of that proceeds. The following points should be kept in mind while matching the proceeds to the expenditure

1. When any proceeds are included in the profit-loss account, then the expenditure related to it should also be written in the profit-loss account whether that expenditure is paid or not. According to this theory, even Outstanding Expenses, though not paid in cash, are considered expenses.

2. When any expenditure, such as some part of the insurance premium, has been paid in advance for the next year, then the amount related to the next year will not be the expenditure of this year but the expenditure of the next year.

3. The cost of the unsold goods at the end of the year and the expenses incurred on it should be carried over to the next year as this merchandise will be sold only the following year. Therefore, the last stock of the year is taken as the initial stock in the next year. Dm

4. Similarly, accrued (receivable) income should be added to the proceeds and advance income should be reduced from the proceeds.