Capital and Revenue Expenditure and Income

  • Receipts may be classified as capital receipt and revenue receipt.
  • Receipts arising from regular business activities and are recurring in nature are called revenue receipts.
  • Receipts not arising from regular business activities and are non-recurring in nature are called capital receipts, for example receipts from issue of shares.
  • Revenue expenditure is the expenditure the benefit of which extends up to one accounting period. They are shown on the debit side of profit and loss account.
  • Capital expenditureis incurred in acquiring or increasing the value of fixed assets, for example purchase of machinery.
  • They are shown in the assets side of the balance sheet.
  • Installation of telephone is a capital expenditure, while regular telephone bill is revenue expenditure. Expenditure incurred in relation to acquisition of fixed assets is capital expenditure. There are differences between capital expenditure and revenue expenditure.
  • Deferred revenue expenditure is the expenditure whose benefit extends to more than one accounting period but not as long as capital expenditure, for example research and development expenditure.
  • Part of the expenditure written off during current accounting period is shown in profit and loss account. The amount not written off is shown in the Balance Sheet.
  • Revenue profit is the profit earned in the normal course of business.
  • Profit earned in connection with sale of fixed assets or issue of share capital is called capital profit.
  • Losses incurred in the normal course of business are revenue losses, for example loss of goods.
  • Losses which are not related to normal course of business are capital losses, for example, loss of assets by fire.

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  • Q1

    What is the accounting treatment of revenue receipts?

    Marks:1
    Answer:

    Revenue receipts are shown in the credit side of Trading and Profit and Loss Account.

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  • Q2

    Give one example of revenue expenditure.

    Marks:1
    Answer:

    Expenditure incurred on purchase of raw material.

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  • Q3

    Where will you show the items of revenue expenditure?

    Marks:1
    Answer:

    Revenue expenditure is shown in Trading and Profit and Loss Account.

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  • Q4

    Give one example of capital expenditure.

    Marks:1
    Answer:

    Purchased furniture for office use.

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  • Q5

    What is revenue expenditure?

    Marks:1
    Answer:

    When the benefit of expenditure extends up to one accounting period, it is called revenue expenditure.

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