CAPITAL AND REVENUE TRANSACTION, ACCOUNTING FOR BAD DEBTS | Accounting | NTA UGC NET JRF Paper2

CAPITAL AND REVENUE TRANSACTION

One of the most important objectives of financial accounting is to find out correct amount of profit or loss and to ascertain the financial position of the business enterprise on a particular date. The concepts of capital and revenue are of fundamental importance to the correct determination of accounting profit for a period and recognition of business assets at the end of that period. The distinction affects the measurement of profit in a number of accounting periods. Transaction of a business enterprise may be classified into:

• Capital Transactions : The transactions which provide benefits or supply services to the business unit for more than one year or one operating cycle of the business are known as capital transactions.
• Revenue Transactions: The transactions which provide benefits or supply services to the business unit for only one accounting year, are known as Revenue transactions.

Capital Expenditure

Under this category comes those expenditure which are incurred for the following purposes:

Purchase of building, land, plant and machinery, furniture and fitting and vehicles that are called fixed assets. The assets that are purchased should be done with the intention of using them for business purpose and not with the intention of making profit through resale. All expenditure incurred on the particular asset to prepare it for using in the enterprise forms the cost of the fixed asset.

Capital expenditure also includes extensions and additions on the fixed asset purchased such as additions to buildings, plant, machinery since it contributes to enhancing productivity during future use. It also includes expenses that would reduce production cost, administrative costs and distribution costs such as expense of shifting business premises, compensation to retrenched employee, etc.

Capital expenditure represents an asset or a liability and is reflected in the balance sheet.

Items listed under capital expenditure are:
Goodwill, freehold land and building, legal charges, lease, expenses incurred on machineries, plants, tools, fixtures, etc. The expenses incurred on trademarks, patents, copyrights, designs are also examples of capital expenditure.

Expenses incurred on erection of plant and machinery also comes under capital expenditure.

Revenue Expenditure

All the expenses are treated as revenue expenditures if it is incurred for the following purposes:

Expenditure made on the purchase of assets meant for resale at a profit or for being converted into saleable goods, such as the cost of goods, raw materials and stores. Apart from this all those expenses which are incurred on the maintenance of assets in proper working order e.g., repairs to plant and machinery, building furniture and fittings etc. also comes under revenue expenditure. Even day to day recurring expenses also comes under revenue expenditure for example expenses of carrying on a business e.g., salaries, rent, rates, taxes, stationery, postage, etc.

All revenue expenditures which are incurred to get revenue income are taken to the profit and loss account.
List of Revenue Expenditures – (Examples of Revenue Expenditures):

The following is a list of the usual items of revenue expenditures:

1. All Expenses which are incurred for the ordinary administration and carrying on the business.
2. All the Expenses incurred on the repairs, renewals and replacement of permanent assets.
3. All the cost of goods for resale is treated as revenue expenditure.
4. All the Cost of raw materials and stores acquired for use in the production process.
5. All the wages paid for production of goods for sale.
6. All the expenses which are incurred on the production and distribution of the final product.
7. All the Loss arising from normal wear and tear and obsolescence of assets.
8. All the Depreciation of lease.
9. Any type of Interest on loans borrowed for the purpose of business.
10. Any type of loss arising from sale of fixed assets.
11. Any type of Fees paid for renewal of patent rights, etc.
12. Any type of expenses incurred on the vehicle.
13. Any expenses incurred on the fan and lights etc.
14. Any loss arising due to assets discarded or totally damaged or destroyed by fire or other reasons.

Deferred Revenue Expenditure

When a large sum of revenue expenditure is incurred in any particular year, the benefit of such expenditure may carry on to several years; such expenditure is called ‘Deferred Revenue’ Expenditure. The utilized portion of expenditure is charged to Profit and Loss Account and the balance is carried forward and are written off in future accounting periods and shown in assets side of the Balance Sheet of the current year. Following are the main characteristics of deferred revenue expenditure:

1. Such expenses are of revenue nature
2. These expenses are relatively of very large amount
3. The benefit of such expenses is extended beyond the accounting year or several accounting year.

Deferred Revenue Expenditure is comprises of the following:-

Expenditures wholly paid in advance: These are the expenses which are usually paid in advance in full during the accounting year.

Expenditures partly paid in advance: such expenses include insurance premium which is payable partly for the current year and partly for the next year. The expired period expenditure is charged to profit & loss A/c and the unexpired portion is taken into the side of balance sheet that has assets column.

Abnormal Losses: Loss incurred due to uninsured risk such as loss due to fire, loss in transit due to accident or confiscation of property in a foreign country.
Such losses are spread over two to three years. This amount is written off and is charged to profit and loss account and balance is shown to assets side of the balance sheet.

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