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

Q.5. Write the short notes on:

1. Capital and revenue profits.

2. Capital and revenue losses. 

Ans. 1. Capital and Revenue Profits: Capital profit is a profit made on sale of fixed assets of the business, or on raising capital (e.g. premium on issue of shares or debentures) and redeeming longterm liabilities. It is to be noted that when a fixed asset is sold then the excess of sale proceeds over the cost price of fixed assets will be capital profit, the difference of cost price and written down value of the assets represents a revenue profit. For example, a machine whose cost price is * 25,000 and written down value is 19.000, is sold for 32,000. The excess of sale proceeds over the cost price, i.e. 32,000 -*25.000 or 7,000 is capital profit and 6,000 (the difference of cost price and written down value) is revenue profit.

Revenue profit is a profit made in the ordinary course of business, e.g. profit on sale of goods, income from investments, etc. Revenue profits are taken to profit & loss account where capital profit should be transferred to capital reserve account, which appears on the liabilities side of the balance sheet.

2. Capital and Revenue Losses: Capital losses are the losses incurred on sale of a fixed asset or on raising share capital whereas revenue losses are losses, which arise during the normal course of business. Revenue losses are debited to profit & loss account but capital losses are shown in the Jalance sheet on the assets side. When capital profits arise these canital losses are set

side. When capital profits arise, these capital losses are set off against them. Ef, however, capital losses are huge, the common practice is to spread them over a number of year and

charge a proportionate amount to profit & loss account to each such year and the unwritten off balance is shown as an asset. If the amount of such losses is small, they are usually debited to the profit & loss account of the year in which they occur. 

Q.6. Which of the following items are capital and which are revenue? Explain with reasons.

1. Preliminary expenses of 50,000 paid on the establishment of company. 

2. Additional capital of 10,000 was introduced by the owner. 

3. Firm’s cashier was robbed of 2,000 which he was carrying cash to deposit in bank. 

4. *20,000 were received from government as subsidy. (2014) 

Ans. 1. Preliminary Expenses of 50,000 Paid on the Establishment of Company: It is treated capital expenditure because expenses of establishment of company are of capital nature.

2. Additional Capital of 10,000, Introduced by the Owner: It is of capital nature because it increases the capital of business.

3. Firm’s Cashier was Robbed of 2,000 which he was Carrying Cash to Deposit in Bank: It is treated revenue item because depositing the cash in bank is a regular trading activity.

4. 20,000 were Received from Government as Subsidy: It is treated revenue item because it is received regularly per year from the government. 

Q.7. Mention the reasons whether the following expenditures are capital or revenue:

1. Compensation paid in breach of a contract. 

2. Replacement cost of an old plant. 

3. Carriage paid on goods purchased. 

4. Wages paid in the erection of new machine. 

5. Labour welfare expenses. (2015) 

Ans. 1. Revenue: Compensation paid in breach of a contract is a revenue expenditure as breach of a contract is an ordinary business activity and compensation paid is the amount to avoid losses.

2. Capital: Replacement cost of an old plant is a capital expenditure because the benefit of this expenditure will be received for a long time.

3. Revenue: Carriage paid on goods purchased is a revenue expenditure. It will increase the cost of goods purchased and sale of goods is a normal business activity,

4. Capital: Wages paid in the erection of new machine is capital expenditure. It is treated as increase in the cost of machine.

5. Revenue: Labour welfare expenses are revenue expenditure. It is normal business expenses. 

Q.8. Legal expenses incurred in depending a suit for breach of a contract to supply goods. Is it capital or revenue expenses? Write.

Ans. Legal expenses incurred in depending a suit for breach of a contract to supply goods are revenue expenses.


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