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

BCOM 1st Year Capital And Revenue Classification Of Receipts 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 B

LONG ANSWER QUESTIONS

Q.1. Explain the meaning and characteristics of capital expenditure and revenue expenditure. Also give suitable examples of these expenditures. How are they treated in the books of account?

Or ‘Revenue expenditure is to be treated as capital expenditure’. Explain 

Ans. (A) Capital Expenditure 

Capital expenditures means the expenditures which are incurred to acquire a fixed asset, to increase the utility and capability of a fixed asset, to acquire capital and to increase the earning capacity of business, Capital expenditure benefits a firm for a long period.

Characteristics of Capital Expenditure Notes

Following are the basic characteristics of capital expenditure:

1. Permanent Nature: Capital expenditures are of permanent nature. These expenditures are incurred for a long period, e.g. 5 years, 10 years and even more.

2. Useful for a Long Period: Capital expenditure benefits a firm for quite a long period. Some are the expenditures which are useful for ever and ever.

3. Purpose is to Use, Not to Sell: An important feature of capital expenditure is that the assets and rights acquired through these expenditure are meant for use in the business and not for sale. They help in running the business smoothly and successfully.

4. Non-recurring Nature: Capital expenditures are of non-recurring nature. These expenditures are not to be repeated again and again. This is the reason why these expenditures are known as fixed assets also. 

Examples of Capital Expenditure

1. Expenditure on Acquiring Fixed Assets: Expenditure incurred on acquiring fixed assets are known as capital expenditure because these assets are acquired for running a business and not for sale, These assets are used in the business for quite a long period. For example, acquisition of land, building, machinery, motor-car, furniture, etc.

2. Expenditure Related with the Acquisition of Fixed Assets: All the expenses incurred in connection with the acquisition of fixed assets, are also known as capital expenditure because they are incurred before the fixed assets are put to actual use. For example, wages paid for the construction of building, expenses on the carriage and establishment of machinery, immediate repair and renewal of an old machine purchased, etc.

3. Expenditure on the Expansion and Improvement of Fixed Assets: Expenditure incurred on the expansion, improvement of a fixed asset to make it more useful, are also known as capital expenditure because they benefit the firm for a long period. For example, construction of new rooms in a building, renewal of machine, expansion of seating capacity in a hall, etc.)

4. Expenditure on Acquiring Rights for Business: Certain rights are to be acquired for establishing and running a business smoothly and in a profitable manner. Expenditure incurred on acquiring these rights are also known as capital expenditure because they benefit a firm for long period. For example, patents and trademark, copyright, goodwill, license, etc.

5. Other Capital Expenditure: (i) Expenditure on mines, garden forests, etc. (ii) Legal expenses on acquiring a fixed asset, (iii) Cost of livestock, etc. 

Accounting Treatment of Capital Expenditure

Capital expenditures are shown in balance sheet as fixed assets. Normally, these assets are depreciated or written off regularly. Amount of such depreciation or amortisation is shown in the debit side of profit & loss A/c as normal business expenses and then deducted from concerned fixed assets.

(B) Revenue Expenditure 

Revenue expenditures are the expenditures which are incurred in normal business routine These expenses are incurred to run the business smoothly, to maintain the working efficiency or fixed assets and to maintain the earning capacity of business. These expenses are incurred again and again. These expenses benefit a firm for a limited period only. 

Characteristics of Revenue Expenditure

Following are the basic characteristics of revenue expenditure:

1. Recurring Nature: Revenue expenditures are of recurring nature. These expenses are incurred again and again in the course of business. The fact is that these expenses occur regularly as long as the business continues.

2. Short Term Benefit: Revenue expenditure benefit a firm for a short period only. The fact is that these expenses benefit the firm only for the particular period in which they are incurred.

3. Object is to Run the Business: Revenue expenses are incurred in the normal routine of business. These expenses help in the smooth functioning of business. These expenses help in maintaining the utility of fixed assets and earning capacity of business.

4. Base of Calculation of Profit & Loss: Profit or loss of business is calculated on the basis of revenue expenses. Profit is the excess of revenue incomes over revenue expenses. 

Examples of Revenue Expenditure

1. Expenses on the Operation of Business: All expenses incurred on business activities, management and administration are known as revenue expenses. For example, Wages and salaries, rent and rates, discount and rebate, advertisement, expenses on purchase and production, office and administration expenses, selling and distribution expenses, etc

2. Expenses on the Purchase and Production of Goods for Resale: All expenses incurred on the purchase, production and storage of goods meant for resale are known as revenue expenses. For example, purchases, carriage, freight, excise duty, wages, manufacturing expenses, fuel and power, storage expenses, etc.

3. Expenses on Fixed Assets: Expenses incurred on the repair and maintenance of fixed assets, depreciation of fixed assets & loss on the sale of fixed assets are known as revenue expenses.

4. Interest on Loan and Capital: Interest, dividend, etc. paid on the amount used for business are known as revenue expenses. Accounting Treatment of Revenue Expenditure

Revenue expenses are taken to be the normal expenses of business. Being so, these expenses are debited to trading and profit&loss A/c. However, depreciation on fixed assets, reserve for bad debts on debtors and provisions for known liability are deducted from concerned assets also.

Revenue Expenditure to be Treated as Capital Expenditure 

Some are the expenses which are taken to be the revenue expenses in routine manner but under specific circumstances, these expenses are treated as capital expenditure. These are as follows

1. Wages: Normally, wages are taken to be the revenue expenditure but if wages are paid for the construction of a building or establishment of a machine or complete overhauling of a plant, these are taken to be the capital expenditure. Such wages are added to the cost of concerned fixed assets.

2. Carriage and Freight: Normally, carriage and freight are taken to be the revenue expenditure but if they are paid for the carriage of fixed assets to the site of business, they are taken to be the capital expenditure. Such expenses are added to the cost of concerned fixed assets.

3. Repair: Normally, repair is taken to be a revenue expenditure but if an old machine is purchased and put to immediate repair, it is taken to be a capital expenditure. Further, if an old machine is thoroughly rennovated, wages paid for it will also be a capital expenditure. Such wages are added to the cost of machine.

4. Raw Materials and Stores: Normally, raw materials and stores are taken to be revenue expenditure but if they are used in the construction of a fixed asset, they are taken to be the capital expenditure and added to the cost of concerned fixed asset.

5. Legal Expenses: Normally, legal expenses are taken to be the revenue expenditure but if they are incurred to acquire some land, building, lease, trademark, etc., they are taken to be the capital expenditure and added to the cost of concerned assets.