Distinction between Capital and Revenue Expenditure Video Lecture | Accountancy Class 11 - Commerce

capital and revenue expenditure what is
expenditure in a layman's terminology
expenditure can be termed as an act of
spending money for goods and services
expenditure is any payment made in
relation with goods and services for
business it can also be termed as any
expense made in relation with getting
benefits for the business expenditure
can be of two types namely capital
expenditure and revenue expenditure let
us take a quick look at both of them
capital expenditure capital expenditure
is expenditure incurred for acquisition
of assets for a firm a capital
expenditure is incurred when a business
spends money either to buy fixed effects
or to add to the value of an existing
fixed asset life of which may extend
beyond the taxable year although an
expense the benefits of capital
expenditure are enjoyed by a firm beyond
the taxable year this may lead to
increase in productivity of an asset or
to increase the earning capacity of a
firm or to decrease working expenditure
examples of capital expenditure are
purchase of plant and machinery land and
such other fixed
it
revenue expenditure revenue expenditure
is expenditure incurred for day-to-day
operating expenses in a firm the benefit
of the revenue expenditure usually
laughs only for one financial year
revenue expenditure is incurred to
generally maintain the assets of a firm
a revenue expenditure is an amount that
is expensed immediately hence it can be
matched with revenues of the current
accounting period routine repairs rent
pays salaries and wages given
advertisement extensive administrative
expenses are examples of revenue
expenditure
let us look at the differences between
capital and revenue expenditure 1
earning capacity of the business to
publish
three nature
for benefits to the business 5
accounting treatment
an example of capital expenditure and
its accounting treatment ABC Company
Limited spent 2 lakh rupees on purchase
of new furniture this is an addition to
the original furniture purchase of 20
lakh rupees identify the kind of
expenditure and also show how it will be
recorded in the books of accounts the
purchase of new furniture results in the
acquisition of additional fixed asset
whose benefit will be availed off in
several accounting years hence it is
treated as capital expenditure the
expense is added to the original cost
and is shown on the asset size in the
balance sheet of the company
an example of revenue expenditure and
its accounting treatment ABG company
limited spent a thousand rupees on
repairs and maintenance of a computer
identify the kind of expenditure
incurred and also show the accounting
treatment for the same the expenditure
is for repairs and maintenance of an
existing asset it is stated as revenue
expenditure because it is the
expenditure related to day-to-day
activities of a business and is
exhausted within one accounting year it
is shown on the debit or expense side of
the profit and loss account in the books
of the company bring tickers
capital and revenue receipts
receipts can be of two times namely
capital receipt and revenue receipt
let us take a quick look at both of them
capital receipts capital receipts are
the funds received into the businesses
that are not part of the operating
activities of the establishment capital
receives include external assistant
markets loans small savings principal
investment in bonds and government
Provident funds it is recorded on the
asset side of the balance sheet revenue
receives any income receipt in the
normal course of business is called
revenue receipts the receipts from the
daily sale of goods or services of a
company is called revenue receipts
these are usually repetative in nature
they are recorded on the credit side of
the profit and loss account
some examples are interest on investment
brokerage received sales etc let us look
at the differences between capital and
revenue receipts one meaning to nature
an example of capital receipt and its
accounting treatments ABX company
limited borrowed a sum of rupees 2 lakh
as bank loan to expand the business
recognized the kind of receipt and show
the accounting treatment for the same
the bank loan taken is treated as a
liability
hence it is posted on the liability side
in the balance sheet an example of
revenue Rashid and its accounting
treatment these two are limited receipts
rupees 20,000 as Commission against
goods sold determine the kind of receipt
and show the treatment for the same
rupees 20,000 is against submission
received on good souls
it is incurred in the normal course of
business and hence it is treated as
revenue received it is posted on the
income side of the profit and loss
account in the books of the company
grain ticklers
a heavy expenditure of a revenue nature
incurred forgetting benefit which
extends to two or more years is termed
as deferred revenue expenditure it is
written off over two years or more
during which the benefit is likely to
last it appears in the asset side of the
balance sheet
it can also be explained as those
expenditures which have been incurred in
an accounting period by the benefit is
spread over a long period of time but
still doesn't create an asset it is also
known as a prepaid expense because it
has the qualities of both a revenue item
as well as a capital item it is known as
deferred revenue expenditure an example
for the same heavy expenditure incurred
an advertisement for promotion of the
company's product is a revenue
expenditure since the amount spent is
too large and the benefits are expected
to be received for a number of years it
will be termed as deferred revenue
expenditure for example advertisement
expenditure incurred is 5 lakh rupees
benefits are expected to be received for
10 years hence every year rupees 50,000
is believed to be spent as advertisement
expenditure
bearing in mind the same example we can
also understand the accounting treatment
of deferred revenue expenditure the
total advertisement cost of five lakh
rupees is it for which benefit will be
available 10 years hence your
advertisement expense 50000 rupees this
amounts of 50000 rupees will be shown as
revenue expenses in profit and loss
account the balance of all lakh fifty
thousand rupees will be shown in the
balance sheet every year one tenth part
of the original advertising expenses
will be written off to profit and loss
account this deferred revenue account
will close in the tenth year that is it
shall have a near balance after the
tenth here some examples of deferred
revenue expenditure one rent paid for
office premises in advance for more than
one year this will be treated as
deferred revenue expenditure because the
benefits are for more than a year to
are in the expenditure for launching a
new product of the company would be
treated as the first revenue expenditure
because the benefit would last for more
than a year huge amount paid as
insurance premium for the insurance
against planting machinery where
insurance cover is for more than one
year to summarize money spent or money
earned by a firm is specified as either
of capital nature or revenue nature
depending on its nature