Capital And Revenue Flashcards
The amount invested by the owner in the business to produce revenue is known as:
A. Income
B. Asset
C. Capital
D. Liability
It is the price of goods sold or services provided by a business to its customers
A. Asset
B. Cost
C. Capital
D. Revenue
The transactions, the effect of which is not exhausted with in the current accounting year are called
A. Revenue transactions
B. Capital transactions
C. Current transactions
D. Monetary transactions
Transactions, having short-term effects are known as
A. Revenue transactions
B. Capital transactions
C. Non-monetary transactions
D. Paper transactions
An expenditure, which is non-recurring and irregular, is called
A. Capital expenditure
B. Revenue expenditure
C. Short-term expenditure
D. Current expenditure
An expenditure, which is incurred to increase the profit earning capacity of a business concern, is
A. Deferred expenditure
B. Current expenditure
C. Capital expenditure
D. Recurring expenditure
Wages paid for the construction of building is an example of
A. Revenue expenditure
B. Capital expenditure
C. Recurring expenditure
D. Short-term expenditure
An expenditure, which is completely exhausted with in the current accounting period is known as
A. Deferred expenditure
B. Revenue expenditure
C. Future expenditure
D. Non-recurring expenditure
An expenditure, which is temporarily increase the profit making capacity of the business is called
A. Deferred expenditure
B. Capital expenditure
C. Revenue expenditure
D. Non-recurring expenditure
Expenditure is a capital expenditure because
A. The amount involved is heavy
B. It is the personal expenditure of the owner out of his capital
C. It is intended to benefit the future period
D. It is a recurring expenditure
Expenditure is revenue expenditure because
A. It is intended to benefit the current period
B. The amount involved is small
C. It is deducted from the gross sale proceeds
D. None of these
Expenditure, which helps to maintain the business efficiency is called
A. Revenue expenditure
B. Deferred expenditure
C. Capital expenditure
D. Future expenditure
Which one of the following is appeared in the balance sheet
A. Revenue expenditure
B. Capital expenditure
C. Both-b, c
D. Deferred expenditure
Depreciation of fixed assets used in the business is an example of
A. Capital expenditure
B. Revenue expenditure
C. None of these
D. Deferred expenditure
All revenue expenditures are taken to
A. Trading & Profit or Loss a/c
B. Trading a/c
C. Profit or Loss alc
D. Balance sheet
An expenditure, incurred to improve the position of the business is known as
A. Deferred expenditure
B. Revenue expenditure
C. Capital expenditure
D. Recurring expenditure
Bad debts are
A. Deferred expenditures
B. Revenue expenditures
C. Capital expenditures
D. None of these
Octori duty paid on machinery, is an example of
A. Revenue expenditure
B. Recurring expenditure
C. Capital expenditure
D. Both a, b
Cost of redecorating a cinema hall is a
A. Capital expenditure
B. Capital loss
C. Revenue expenditure
D. None of these
A revenue expenditure, the benefit of which is not confined to one accounting year is called
A. Non-current expenditure
B. Revenue expenditure
C. Future expenditure
D. Deferred expenditure
An expenditure, which increases the utility or productive capacity of an
A. Revenue expenditure
B. Capital expenditure
C. Deferred expenditure
D. None of these
Heavy expenditure on advertisement for making a new product is a
A. Revenue expenditure
B. Deferred expenditure
C. Capital loss
D. Non-recurring expenditure
Distinction between capital and revenue items is important for the preparation
A. Balance sheet
B. Trading and Profit or Loss a/c
C. Bank Reconciliation Statement
D. Both a, b
Capitalized expenditures are shown in
A. Trading a/c
B. Profit or Loss a/c
C. Income statement
D. Balance sheet
Preliminary expenses paid in the formation of a company is a
A. Capital expenditure
B. Deferred expenditure
C. Revenue expenditure
D. Capital loss
An expenditure incurred to keep the activities of a concern going on is:
A. Capital expenditure
B. Future expenditure
C. Revenue expenditure
D. None of these
Receipts, which are non-recurring by nature, are called
A. Revenue receipts
B. Current receipts
C. Capital receipts
D. Capital profit
A receipt is a revenue receipt because
A. The amount is small
B. It relates to routine activity of the business
C. It is received in the accounting year
D. None of these
A receipt is a capital receipt because
A. The amount is heavy
B. It relates to fixed assets
C. It is credited to capital account
D. It is intended to benefit the future period
Capital receipts are shown in the balance sheet on the
A. Asset side
B. Debit side
C. None of these
D. Liability side
Revenue receipts are shown in
A. Profit and Loss a/c (debit) side
B. Profit and Loss a/c (credit) side
C. Balance sheet (debit) side
D. Trading a/c (debit) side
À profit, which is earned on the sale of a fixed asset, is called
A. Revenue profit
B. Capital profit
C. Gross profit
D. None of these
The profit that is earned during the ordinary course of business is regarded as
A. Revenue profit
B. Capital profit
C. Deferred profit
D. None of these
Capital profit should be transferred to
A. The Trading a/c
B. Income statement
C. Balance sheet
D. Profit and Loss a/c
The loss incurred on raising capital of a joint stock company is called as
A. Capital loss
B. Revenue loss
C. Capital reserve
D. Normal loss
Capital loss is shown in balance sheet on .
A. Asset side
B. Liability side
C. Both a &b
D. Credit side
Loss on sale of goods is an
A. Capital loss
B. Revenue loss
C. Revenue payment
D. Deferred loss
A loss is a revenue loss because
A. It is related to current assets
B. It is incurred to decrease the tax liability
C. It arises due to normal reasons .
D. None of these
A loss is a capital loss because
A. It arises due to abnormal reasons
B. It is another name given to drawings out of capital
C. It relates to fixed asset
D. All of these
A payment is a capital in nature when
A. It arises due to abnormal reasons
B. The amount is heavy
C. It relates to capital expenditures
D. None of these
C
D
B
A
A
C
B
B
C
C
A
A
C
B
A
C
B
C
C
D
B
B
D
D
B
C
C
-
B
D
B
B
A
C
A
A
B
B
A
C
CAPITAL AND REVENUE
Transactions, the effect of which is not exhausted within the current accounting year or the benefit of which is received by the business for a number of years, are called capital transactions. On the other hand the transactions, the effect of which is exhausted within the current Accounting year or the benefit of which is received by the business within a year, are called revenue transactions.
For example, a building is used for a long time, so purchase of building is capital transaction. In the same way stationery etc. are meant for day to day use and are consumed in a short time, so purchase of stationery etc., is a revenue transaction.
Define capital expenditure
An expenditure which results in the acquisition of permanent asset which is intended to permanently used in the business for the purpose of earning revenue, is known as capital expenditure. These expenditures are ‘non-recurring’ by nature. For example, money spent on the purchase is building, machinery, furniture etc.
Moreover, any expenditure which is incurred for the purpose of increasing profit earning capacity or reducing cost of production is a capital expenditure.
Sometimes the expenditure even not resulting in the increase of profit earning capacity but acquires an asset comparatively permanent in nature will also be a capital expenditure.
Addition or Extension of Assets
Money spent on installation and erection of plant and machinery and other fixed assets.
Wages paid for the construction of building.
Structural improvements or alterations in fixed assets resulting in an increase in their useful life or profit earning capacity
REVENUE EXPENDITURES:
All the expenditures which are incurred in the day to day conduct and administration of a business and the effect of which is completely exhausted within the current accounting year are known revenue expenditure. These expenditures are recurring by nature i.e. which are incurred for meeting day to day requirements of a business and the effect of these expenditures is always short-lived i.e. the benefit thereof is enjoyed by the business within the current accounting year. These expenditures are also known as “expenses or expired costs.”
Purchase of goods, salaries paid, postages, rent, travelling expenses. Stationery purchased, wages paid on goods purchased etc.
This expenditure is incurred on items or services which in less than one year and, therefore, only temporarily increase profit-making capacity of the business.
Distinction between Capital Expenditure and Revenue Expenditure
Revenue Expenditure Capital Expenditure
Its effect is temporary, i.e. the benefit is received within the accounting year. 1. Its effect is long-term, i.e. it is not exhausted
within the current accounting year–its benefit is
received for a number of years in future.
Neither an asset is acquired nor the value of
an asset is increased. An asset is acquired or the value of an existing 2.
asset is increased.
It has no physical existence because it is incurred
on items which are used by the business Generally it has physical existence except intangible assets.
It is recurring and regular and it occurs repeatedly. 4. It does not occur again and again. It is non recurring
and irregular.
5. This expenditure helps to maintain the business. This expenditure improves the position of the business
The whole amount of this expenditure is shown in trading P & L A/c or income statement.
A portion of this expenditure (depreciation on assets) is shown in trading & P & L A/c and the balance is shown in the balance
sheet on asset side.
It does not appear in the balance sheet It appears in the balance sheet until its benefit is fully
exhausted.
It reduces revenue (profit) of the business.
It does not reduce revenue (profit) of the business. Purchase of Fixed asset does not affect revenue.
When Revenue Expenditures are not regarded as a Revenue Expenditures?
There are some items of expenditure which are revenue by nature, yet they are not regarded a revenue expenditure. Such expenditures may be divided into two groups
1. Deferred Revenue Expenditure:
This is a revenue expenditure, the benefit of which is not confined to one accounting year it extends to future accounting year or years also. However, this expenditure does not result in the acquisition or any fixed asset. For example, heavy advertisement expenditure is incurred on introduction of a new product in the market. This is a revenue expenditure in nature and the benefit is enjoyed by the business over a number of years, but no asset of permanent nature is acquired. A portion of this expenditure, is treated
As revenue expenditure chargeable in the current accounting year and the remaining portion is temporarily treated as capital expenditure and shown on the Asset side of the Balance Sheet.
Below are a few examples of such expenditure:
(a) Expenditure incurred to the formation of a joint stock company i.e. Preliminary Expenses.
(b) Expenditure on research and experiment connected with the introduction of a new product.
(c) Heavy expenditure on advertisement for marketing a new product,
(d) Heavy expenditure on repairs to property,
- Capitalized Expenditure:-
Some expenditures although of revenue nature basically, are directly connected with fixed asset and spent directly on the acquisition of fixed assets. Such expenditures are called Capitalized Expenditures”.
For example, we buy a second -hand plant for Rs. 50,000 this is undoubtly a capital expenditure. A further sum of Rs. 5,000 is spent on its repair and overhauling in order to bring the plant into proper working order. Expenditure revenue by nature, will be treated as Capital Expenditure not to Repairs A/c.
Thus, a revenue expenditure which increases the utility and working capacity of the asset, is treated as capitalized expenditure. Below are a few examples of such expenditure:
(a) Expenditure on installing an asset. i.e. installation charges.
(b) Expenditure on repair to property, if the production capacity or utility of property is increased. It may, however, be noted that sometimes a new asset may require some repair after its purchase but before it is installed a although it may not increase the production capacity treated as capitalized expenditure.
Expenditure incidental to purchase of fixed assets for example duty, carriage, octroi duty, import duty on assets purchased. (d) Expenditure on removal of old property. (e) Cost of repair to second-hand assets: Repair is a revenue expenditure. But the cost of repair after buying a second-hand asset to bring them to proper working condition is terms as Capitalized Expenditure. (f)Wages: It is a revenue expenditure but if paid for installation of a machine or plant, then it is treated as a capitalized expenditure.
(g) Legal Charges: Legal charges i.e. lawyer’s fee, court fee in connection with the purchase of asset of permanent nature are regarded as capital expenditure.
(h) Interest: Interest paid is generally a revenue expenditure. But in some industries like iron &
steel, cement industry etc. a concern has to wait for a long period before it starts operation.
Interest for such period on capital and loan is treated as capital expenditure.
NOTE:
From the above discussion, the distinction between ‘deferred revenue expenditure’ and ‘capitalized expenditure’ may be noted. The amount of deferred revenue expenditure is generally heavy and it is spread over a number of years. But capitalized expenditure is added in full to the cost of concerned asset, whatever may be the amount of expenditure. Hence there is no question of apportioning the expenditure over a number of years.
Capital and Revenue Receipts
CAPITAL RECEIPT:
Receipts which are non-recurring (not received again and again) by nature and whose benefit enjoyed over a long period are called “Capital Receipts”. e.g. money brought into the business by the owner (capital invested), loan from bank, sale proceeds of fixed assets etc. Capital receipt is shown on the liabilities side of the Balance Sheet.
REVENUE RECEIPT:
Receipts which are recurring (received again and again) by nature and which are available for meeting all day to day expenses (revenue expenditure) of a business concern are known as “Revenue Receipts”. e.g. sale proceeds of goods, interest received, commission received, rent received, dividend received etc.
Distinction between Capital Receipt and Revenue Receipt:
Revenue Receipt Capital Receipt
It has short-term effect. The benefit is enjoyed within one accounting period. It has long-term effect. The benefit is enjoyed for many years in future.
It occurs repeatedly. It is recurring and regular. It does not occur again and again. It is non-recurring and irregular.
It is shown in profit and loss account on the credit side. It is shown in the Balance Sheet on the liability credit side.
It does not produce capital receipt. Capital receipt when invested produces revenue receipts for example when capital are invested by the owner, business gets revenue receipts.
This does not increase or decrease the value of asset or liability. The capital receipt decreases the value of asset or increases the value of liability e.g. sale of a fixed asset, loan from bank etc.
Sometimes, expenses of capital nature are to for revenue receipt. e.g. purchase of shares of a company is a capital expenditure but dividend received in it is a revenue receipt. Sometimes expenses of revenue ‘nature are to be incurred for such receipt e.g. on obtaining loan (a capital receipt) interest is paid until its but dividend received on shares is a revenue repayment.
CAPITAL AND REVENUE PROFITS:
CAPITAL PROFIT
Capital profit is a profit which is earned on the sale of a fixed asset or profit earned on raising capital for a company (by issuing shares at premium). This is not a regular profit of the business and is not earned in the ordinary trade of the business.
For example, if a machinery having book value of Rs. 50,000 is sold for Rs. 60,000, the profit of Rs. 10,000 will be a capital profit. In the same way, a joint stock company issues shares of Rs. 2,00,000 at a premium of Rs. 10,000 to raise capital, such premium of Rs. 10,000 will be a capital profit.
In this connection the distinction between capital receipt and capital profit may be noted. A machinery of Rs, 50,000 is sold for Rs. 60,000. Here capital receipt is Rs. 60,000 and capital profit is Rs. 10,000. This type of profit is not recurring and regular. It will be shown on the liability side of the Balance Sheet under the head “Capital Reserve”.
REVENUE PROFITS:
This is a profit which is earned during the ordinary course of business e.g. profit on sale of goods, rent received, interest received etc.
CAPITAL AND REVENUE LOSSES:
CAPITAL LOSS:
This is a loss suffered by a business on the sale of a fixed asset or it is incurred on raising capital of a joint stock company. This is not a recurring loss and is not made in the ordinary course of the business. e.g. A machinery having book value of Rs. 50,000 is sold for Rs. 45,000, the loss of Rs. 5,000 is a capital loss. In the same way, a company issued shares of Rs. 1,00,000 at 10% discount, the loss of Rs. 10,000 (10% of Rs. 1,00,000) is a capital loss. Capital loss is sown in the Balance Sheet on the asset side as a fictitious asset which is gradually written off out of the profits every year.
REVENUE LOSS:
This loss is made in the ordinary course or day to day operation of a business such as loss on sale Loss on sales of good etc. Revenue loss appears in the profit and loss account or income statement in the year in which it occurs.
CAPITAL AND REVENUE PAYMENTS
It may be noted that there is a difference between an expenditure and payment. Expenditure is the full amount spent by a business whether paid or yet to be paid while payment means the amount actually paid. For example, a machinery is purchased for Rs. 50,000 from Saleem & Co., Rs. 30,000 were paid to them in cash, agreeing to pay Rs. 20,000 after one month. In this case, total amount spent is Rs. 50,000 but the payment is Rs. 30,000 only.
CAPITAL PAYMENT:
This is an amount which is actually paid on account of a capital expenditure.
REVENUE PAYMENT:
This is an amount which is actually paid on account of some revenue expenditure. For example, we purchase goods of Rs. 30,000, this is a revenue expenditure of Rs. 30,000. We paid cash to the supplier only Rs. 20,000, this is a revenue payment. If the whole amount is paid in cash, then both the revenue expenditure as well as revenue payment will be Rs. 30,000.
