BCOM 1st Year Capital And Revenue Classification Of Income Study Material Notes

BCOM 1st Year Capital And Revenue Classification Of Income Study Material Notes :- Capital and Revenue, Classification of income, Classification of Expenditure, Classification of Receipts All Topic Notes Question Answer unit wise Chapter wise Syllabus Study material Question Papers Examination Papers Notes.

Section A


Q.1. Explain the meaning of capital expenditure.

Or Define capital and revenue expenditures.

Ans. Capital Expenditure: All the expenses incurred in acquiring permanent assets (tangible or ‘intangible) or in the permanent improvement of or the addition to, or the extension of, an existing assets, which are significant in amount and which gives benefit in future accounting period, is known as capital expenditure. Capital expenditures are incurred to increase the earning capacity of the business or to reduce its working expenses. For example, expenses incurred on land, building, plant and machinery patents, trademarks, mining rights, etc.

Revenue Expenditure: Revenue expenditure consists of expenditure the benefit of which, is reaped in current accounting period and which merely seeks to maintain the business or keep assets in satisfactory operating condition. This includes the following:

1. Cost of material purchased for production process or resale to the extent these are used or sold during the year. 

2. Wages paid to the workers engaged in producing commodities for sale. 

3. Other expenses incurred for the day to day running of the business. 

4. The cost of using the fixed assets of the business (i.e. depreciation) and of maintaining their efficiency by means of repairs, renewals and replacement. 

5. The expenditure incurred to maintain the ownership of an asset. 

Q.2. Distinguish between capital and revenue expenditure. (2016) 

Ans. Difference between Capital Expenditure and Revenue Expenditure 

S.No. Basis of difference Capital expenditure Revenue expenditure
1. Origin Capital expenditures are incurred for purchase of fixed assets. Revenue expenditures are incurred on the goods purchased for resale.
2. Relation It is incurred to bring and establish the purchased assets. It is incurred in relation to the goods purchased for resale.
3. Object It is incurred  for  permanent improvement or expansion of an existing asset It is incurred to maintain the efficiency of fixed assets.
4. Result It is incurred for improvement of production capacity and income of business. It is incurred for operations of business such as rent, tax, salary, etc.
5.  Effect on capital or goods It is incurred to increase the capital of business.e.g. Under-writing commission. It is incurred for making the goods saleable e.g. Production expenses, Manufacturing expenses ,etc.

Q.3. What do you mean by deferred revenue expenditure?

Ans. A heavy expenditure of revenue nature, the benefit of which is likely to extend beyond the year in which it is incurred is called as ‘deferred revenue expenditure’. For example; at the time of introducing a product in the market, a concern may spend a heavy amount on advertising and other publicity the benefit of which, will last quite a few years. In such a case it is proper to charge only a part of the total cost of such publicity to the current year’s profit and loss account and to carry the balance forward as the deferred revenue expenditure which will be charged to revenue by degrees over the period during which benefit is expected to be derived from it. The balance carried forward is shown in balance sheet as an asset. Other examples of deferred revenue expenditure are preliminary expenses, brokerage and underwriting commission, discount on issue of shares and debentures, heavy repairs, research and development expenses, start up costs, etc.

Q.4. Differentiate between capital receipts and revenue receipts. 

Ans. Difference between Capital Receipts and Revenue Receipts

1. Meaning Capital receipts are received against sale of assets used for carrying the business. Revenue receipts are the receipts which are closely related with normal business activity.
2. Frequency Capital receipts arise occasionally, not regularly. Revenue  receipts arise regularly in the normal course of business.
3. Accounting treatment Capital receipts are shown in balance sheet, by deducting it from fixed assets or as liabilities. Revenue receipts are shown in the credit side of profit & loss account.
4. Sacrifice of rights Capital receipts arise only when an asset or aright is sacrificed. No such sacrifice is required fir revenue receipts.
5. Examples Capital introduced by the proprietors, issue of shares and debentures, sale of fixed assets, etc, Sale of  goods and services, discount and commission received, income from investment, etc.

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