Everybody expects that a business will continue for an indefinite period. The
features of all the transactions of a concern are analyzed to ascertain the result of all
of its business operations and financial position of a particular period. Some
transactions are such those benefits are achieved for a longer period. Thinking about
the concept transactions are divided into two types as Capital and Revenue. The
actual profit and loss and the condition of the financial matter depend largely on
dividing the transactions properly. So the object of accounting is achieved through
identifying the two types properly.
Concept of Capital and Revenue Transactions
All the transactions are divided into two types, Capital and Revenue. Capital transactions give more benefits than Revenue transactions over the period. Revenue transactions take place regularly while Capital is rare or irregular. There are other aspect/features to differentiate these two types of transactions from each another.
Capital Receipts and Income
The receipts, which are irregular, amount of which are and the benefits of which are more than a year, are known as Capital Receipts. In business capital, loan taken from bank, selling of fixed asset (land, furniture, machinery etc) are examples of Capital Incomes. However, Capital Receipts and Capital Incomes seem to be synonymous but the difference is identical. Capital Income is a part of Capital Receipt. Capital Income does not occur regularly and its example is not many. After using machinery for several years, it may generate some income by selling it. For example, old machinery is sold for 80,000 $ and the current value of which is fixed at 65,000 $ Here the capitalistic income is 15,000 $ (80,000-65,000). It is to be noted that capitalistic receipt 80,000$ is not the actual Capitalistic income.
Capital Expenditure:
All expenditure of non-recurring nature, the benefits of which are enjoyed by the business for a long time is called Capital Expenditure. Fixed asset (land, furniture, machinery, motorcar etc) purchase, other expenditure related to the purchase of fixed asset (import, freight, carriage, installation expense etc.) is known as Capitalistic Expenditure. It is to be remembered here that the expenses that increases the life or volume of asset will also be treated as Capitalistic Expense. Example: $10,000 is added to an existing old machinery to make it in a workable condition will increase the life of the machinery. It can be said that the expenses, which will ensure further utility over the period, will belong to Capitalistic Income.
Revenue Receipts and Income:
All recurring receipts by way of usual incomes or profit of business, which are used for meeting day-to-day expenses of the business, are called Revenue Receipts. For example sale proceeds of goods, interest on money deposited in bank, rent received, commission received are examples of Revenue Receipts. However, these two sound similar but there are differences between the two. Not all Revenue Receipts at a certain time is supposed to be treated as Revenue Income. For example, rent received $50,000 in 2011 but $ 10,000 of which are adjusted for 2012. Here Revenue Receipt is $ 50,000 but Revenue Income is $ 40,000.
Revenue Payments/Expenses:
The recurring expenses of an organization are to run the business and the utility of which is expired within short time is called revenue expense. Purchase of goods, rent paid, salary paid, purchase of stationery, advertisement expense etc. are the examples of Revenue Expense. Revenue Expenses do not acquire wealth rather they contribute for the maintenance of asset. However, Revenue payments and Expenses sound similar but there is a minor difference. Revenue Expense is only a part of revenue payments. Often previous accounting periods due and next accounting period’s advance are paid along with current year’s expenses. The total amount paid together for current, previous, and next accounting period is revenue payments, only the current portion will be considered as revenue expense. If maintenance expense of fixed asset does not affect its lifetime, it will be recorded as revenue expense. There are some expenses that revenue in nature but benefit obtained from the expense is not for a short term but for a long term of period. Brief idea about the expense is mentioned here:
Deferred Revenue Expenditures
Expenditure of revenue nature the benefit of which extends beyond the accounting period in which it is incurred, is generally written off over a number of years during which it is expected to benefit the business. The unwritten portion of such an expenditure, which is carried forward to the subsequent years, is called Deferred Revenue Expenditure. expense of prior research for making a new product, expenditure of a big amount for a special type of research, big expenditure on an advertisement campaign, transfer cost of a business are some of the examples of deferred revenue expenditures.
Necessity for differentiating between Capital and Revenue Transactions:
A businessperson needs to assess his economic and financial condition after a certain period (generally in year). For this, at least three statements need to be prepared – Statement of Comprehensive Income (which is the mixture of previous trading and profit and loss account or income statement), Statement of Owner’s Equity, and Statement of Financial Position (which is the previous balance sheet). From the Comprehensive Income we come to know the amount of profit and loss, from the Owner’s Equity Statement the amount of owner’s interest to the business and from the Statement of Financial Position we will be able to know about the asset and liability of a business. Profit and loss of a business is ascertained preparing Comprehensive Income Statement only based on Capital and Revenue Income and Expenses. On the other hand, preparation of Statement of Financial Position based on Capital Receipts and Capital Expenses asset, liability, and Owner’s Equity are ascertained. If these two types of transactions exchanges position in financial statement, the actual loss and asset, liability and owner’s equity can never be identified.
The impact of Capital and Revenue Transactions
The impact of capital and revenue transactions in business is of two types. Capital Receipts indicate the liability of the business. For example – taking loan from bank must be refunded after a long time. Capitalistic Expense is an asset. For example – Purchased machinery will be used to produce goods for a long time and help to earn profit. On the other hand, Revenue incomes like - goods sold, rent received, commission received, and interest received etc increase the profit of the business. Moreover, Revenue Expenses like – goods purchased, salary paid, interest paid etc decrease the profit of the business. So, deducting Revenue Expenses from the Revenue Income the Net profit or loss of the business can be identified. Identification of this net profit or loss is very important because the owner cannot take more than of his obtained profit.
Illustration:
Following information are extracted from the accounts book of Bengal Engineering
firm on 31 March 2011:
1. Rent $.750
2. Electric expense $.7,700($.6,000 for new wire)
3. Transportation in cost $.6,500($.5,000 for new cement mixing machine)
4. Drilling machine purchased $.4100.
Requirements: What is the amount of capital & revenue expenditure? Solution: Capital Expenditure: Revenue Expenditure:
New electric wire cost New mixing machine transport cost Drilling machine $.6,000 ,5,000 $, 4,100 $ ,15,100 Rent Electric expense Transport cost $.750 $.1,700 $.1,500 $.3,950
Concept of Capital and Revenue Transactions
All the transactions are divided into two types, Capital and Revenue. Capital transactions give more benefits than Revenue transactions over the period. Revenue transactions take place regularly while Capital is rare or irregular. There are other aspect/features to differentiate these two types of transactions from each another.
Capital Receipts and Income
The receipts, which are irregular, amount of which are and the benefits of which are more than a year, are known as Capital Receipts. In business capital, loan taken from bank, selling of fixed asset (land, furniture, machinery etc) are examples of Capital Incomes. However, Capital Receipts and Capital Incomes seem to be synonymous but the difference is identical. Capital Income is a part of Capital Receipt. Capital Income does not occur regularly and its example is not many. After using machinery for several years, it may generate some income by selling it. For example, old machinery is sold for 80,000 $ and the current value of which is fixed at 65,000 $ Here the capitalistic income is 15,000 $ (80,000-65,000). It is to be noted that capitalistic receipt 80,000$ is not the actual Capitalistic income.
Capital Expenditure:
All expenditure of non-recurring nature, the benefits of which are enjoyed by the business for a long time is called Capital Expenditure. Fixed asset (land, furniture, machinery, motorcar etc) purchase, other expenditure related to the purchase of fixed asset (import, freight, carriage, installation expense etc.) is known as Capitalistic Expenditure. It is to be remembered here that the expenses that increases the life or volume of asset will also be treated as Capitalistic Expense. Example: $10,000 is added to an existing old machinery to make it in a workable condition will increase the life of the machinery. It can be said that the expenses, which will ensure further utility over the period, will belong to Capitalistic Income.
Revenue Receipts and Income:
All recurring receipts by way of usual incomes or profit of business, which are used for meeting day-to-day expenses of the business, are called Revenue Receipts. For example sale proceeds of goods, interest on money deposited in bank, rent received, commission received are examples of Revenue Receipts. However, these two sound similar but there are differences between the two. Not all Revenue Receipts at a certain time is supposed to be treated as Revenue Income. For example, rent received $50,000 in 2011 but $ 10,000 of which are adjusted for 2012. Here Revenue Receipt is $ 50,000 but Revenue Income is $ 40,000.
Revenue Payments/Expenses:
The recurring expenses of an organization are to run the business and the utility of which is expired within short time is called revenue expense. Purchase of goods, rent paid, salary paid, purchase of stationery, advertisement expense etc. are the examples of Revenue Expense. Revenue Expenses do not acquire wealth rather they contribute for the maintenance of asset. However, Revenue payments and Expenses sound similar but there is a minor difference. Revenue Expense is only a part of revenue payments. Often previous accounting periods due and next accounting period’s advance are paid along with current year’s expenses. The total amount paid together for current, previous, and next accounting period is revenue payments, only the current portion will be considered as revenue expense. If maintenance expense of fixed asset does not affect its lifetime, it will be recorded as revenue expense. There are some expenses that revenue in nature but benefit obtained from the expense is not for a short term but for a long term of period. Brief idea about the expense is mentioned here:
Expenditure of revenue nature the benefit of which extends beyond the accounting period in which it is incurred, is generally written off over a number of years during which it is expected to benefit the business. The unwritten portion of such an expenditure, which is carried forward to the subsequent years, is called Deferred Revenue Expenditure. expense of prior research for making a new product, expenditure of a big amount for a special type of research, big expenditure on an advertisement campaign, transfer cost of a business are some of the examples of deferred revenue expenditures.
Necessity for differentiating between Capital and Revenue Transactions:
A businessperson needs to assess his economic and financial condition after a certain period (generally in year). For this, at least three statements need to be prepared – Statement of Comprehensive Income (which is the mixture of previous trading and profit and loss account or income statement), Statement of Owner’s Equity, and Statement of Financial Position (which is the previous balance sheet). From the Comprehensive Income we come to know the amount of profit and loss, from the Owner’s Equity Statement the amount of owner’s interest to the business and from the Statement of Financial Position we will be able to know about the asset and liability of a business. Profit and loss of a business is ascertained preparing Comprehensive Income Statement only based on Capital and Revenue Income and Expenses. On the other hand, preparation of Statement of Financial Position based on Capital Receipts and Capital Expenses asset, liability, and Owner’s Equity are ascertained. If these two types of transactions exchanges position in financial statement, the actual loss and asset, liability and owner’s equity can never be identified.
The impact of Capital and Revenue Transactions
The impact of capital and revenue transactions in business is of two types. Capital Receipts indicate the liability of the business. For example – taking loan from bank must be refunded after a long time. Capitalistic Expense is an asset. For example – Purchased machinery will be used to produce goods for a long time and help to earn profit. On the other hand, Revenue incomes like - goods sold, rent received, commission received, and interest received etc increase the profit of the business. Moreover, Revenue Expenses like – goods purchased, salary paid, interest paid etc decrease the profit of the business. So, deducting Revenue Expenses from the Revenue Income the Net profit or loss of the business can be identified. Identification of this net profit or loss is very important because the owner cannot take more than of his obtained profit.
1. Rent $.750
2. Electric expense $.7,700($.6,000 for new wire)
3. Transportation in cost $.6,500($.5,000 for new cement mixing machine)
4. Drilling machine purchased $.4100.
Requirements: What is the amount of capital & revenue expenditure? Solution: Capital Expenditure: Revenue Expenditure:
New electric wire cost New mixing machine transport cost Drilling machine $.6,000 ,5,000 $, 4,100 $ ,15,100 Rent Electric expense Transport cost $.750 $.1,700 $.1,500 $.3,950
