Classification of Expenditure and Receipts as Capital or Revenue

Capital Receipts: Receipts which do not arise from the regular course of business are known as capital receipts. They are of a non-recurring nature and are not included in the revenue of the business. Examples of capital receipts are sale of fixed assets, issue of shares, etc.

Revenue Receipts: Receipts which arise from the regular course of business are known as revenue receipts. They are recurring in nature and are included in the revenue of the business. Examples of revenue receipts are sales, rent received, commission received, etc.

Capital Expenditures: Expenditures which are incurred for acquiring fixed assets or increasing their earning capacity are known as capital expenditures. They are non-recurring in nature and are not charged to the revenue of the business. Examples of capital expenditures are purchase of land, building, machinery, etc.

Revenue Expenditures: Expenditures which are incurred for the normal day-to-day functioning of the business are known as revenue expenditures. They are recurring in nature and are charged to the revenue of the business. Examples of revenue expenditures are salaries and wages, rent, electricity bills, etc.

Answer

The insurance claim received on account of machinery damaged completely by fire is a capital receipt. This is because it does not arise from the regular course of business, and is of a non-recurring nature. The machinery was a fixed asset of the business, and the insurance claim received for its damage will be used to acquire a new machinery or repair the damaged one. Therefore, it is a capital receipt and not a revenue receipt.

Conclusion

In conclusion, it is important to classify expenditures and receipts as capital or revenue to determine their impact on the financial statements of a business. Capital receipts and expenditures are non-recurring in nature and do not affect the revenue of the business, while revenue receipts and expenditures are recurring in nature and are included in the revenue of the business.

Because insurance is on machinery so machinery are capital and insurance also related to machinery so it is capital receipt