DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE

ALSO DISTINCTION BETWEEN CAPITAL AND REVENUE RECEIPTS

CATEGORIES OF BUSINESS TRANSACTIONS

CAPITAL EXPENDITURE REVENUE EXPENDITURE CAPITAL RECEIPTS REVENUE RECEIPTS

CAPITAL AND REVENUE TRANSACTIONS

BASIC PRINCIPLE: ALL EXPENSES AND RECEIPTS OF REVENUE NATURE ARE TAKEN TO TRADING AND PROFIT & LOSS ACCOUNT. ALL EXPENDITURES AND RECEIPTS OF CAPITAL NATURE ARE TAKEN TO BALANCE SHEET.

NATURE OF REVENUE RECEIPTS/PAYMENTS

ARE SMALLER IN SIZE(RELATIVELY)
ARE RECURRING IN NATURE THE BENEFITS ARE OVER A SHORTER PERIOD ( Max.1 YEAR) THE PURPOSE IS TO RUN THE BUSINESS ON A DAY TO DAY BASIS

MAINTAIN CONDITION

ASSETS

IN

WORKING

NATURE OF CAPITAL RECEIPTS/PAYMENTS

AMOUNTS ARE LARGE(RELATIVELY). USUALLY
ARE NON-RECURRING IN NATURE.

THE BENEFITS ARE OVER LONGER DURATION (BEYOND 1 YEAR).

THE PURPOSE IS TO ENHANCE PRODUCTIVITY OF THE ASSETS.

DEFERRED REVENUE EXPENDITURE

THERE ARE CERTAIN EXPENDITURES WHICH ARE OTHERWISE REVENUE IN NATURE BUT SOMETIMES UNUSUALLY LARGE AND WHOSE BENEFIT TO THE ORGANISATION MAY ACCRUE EVEN IN THE COMING YEARS. THESE MAY BE TREATED AS DEFERRED REVENUE EXPENDITURE , CARRIED TO THE BALANCE SHEET , AND WRITTEN OFF TO THE PROFIT & LOSS ACCOUNT OVER A PERIOD OF TIME.

CAPITAL RECEIPTS

i. ii.

SAME IS THE CASE WITH CERTAIN RECEIPTS SUCH AS SALE OF ASSETS WHEREIN: SALE VALUE MINUS COST IS A CAPITAL RECEIPT (I.E. CAPITAL PROFIT). COST MINUS BOOK VALUE IS REVENUE RECEIPT (i.e. REVENUE PROFIT). THERE IS A THIN LINE BETWEEN CAPITAL & REVENUE CLASSIFICATION. FOR INSTANCE REPAIRS TO MACHINERY WHICH KEEPS THE ASSET IN WORKING CONDITION IS CHARGED TO THE P & L A/C WHILE BETTERMENT EXPENSE IS CAPITALISED.

EXAMPLES OF EACH TYPE OF CLASSIFICATION

i. CAPITAL NATURE: PURCHASE OF ASSETS SUCH AS BUILDING, MACHINERY, VEHICLES. ii. EXPENDITURE IN PURCHASE /SETTING UP OF CAPITAL GOODS/ASSETS iii. EXCESS OF SALE PRICE OF ASSET OVER ITS COST PRICE iv. FUNDS RAISED THRU ISSUE OF SHARES, ANDDEBENTURES

EXAMPLES OF EACH TYPE OF CLASSIFICATION

i. REVENUE NATURE: ALL TRANSACTIONS RELATING TO NOMINAL ACCOUNTS i.e. REVENUES AND EXPENSES. ii. EXCESS OF SALE VALUE OF ASSET OVER BOOK VALUE, UPTO COST OF ASSET.

EXAMPLES OF EACH TYPE OF CLASSIFICATION

i. DEFERRED REVENUE EXPEND. LARGE ADVERTISING EXPENDITURE FOR(SAY) LAUNCH OF A PRODUCT ii. EXPENDITURE FOR RAISING OF FUNDS INCLUDING PREPARATION OF PROJECT REPORT iii. INITIAL EXPENSES FOR SETTING UP OF A COMPANY

UNIT 1. INTRODUCTION
Meaning of accounting and financial statements Accounting standards Accounting Mechanics

UNIT 2. ACCOUNTING FOR INVENTORIES AND FIXED ASSETS

Introduction Cost of inventory Methods of inventory costing Inventory control techniques Determination of the cost of various types of fixed assets Concept and methods of providing depreciation Implications on changing the method of depreciation

UNIT 3. PREPARATION OF FINANCIAL STATEMENTS: TRIAL BALANCE AND ADJUSTMENTS

Preparation of trial balance from general ledger balances Detecting errors revealed and concealed by a trial balance Passing of different adjustments entries

UNIT 4. PREPARATION OF FINANCIAL STATEMENTS: PROFIT AND LOSS ACCOUNT

Preparation of P&L a/c from a given trial balance Distinction between capital and revenue expenditure

UNIT 5. PREPARATION OF FINANCIAL STATEMENTS: BALANCE SHEET

Preparation of balance sheet Limitation of balance sheet Vertical form of financial statement Analysis of balance sheet