Account 6 Marks Question

Diffrence between Capital Receipt and Revenue Receipt:

	Capital Receipt	Revenue Receipt
1.	it is the amount realised by sale of fixed assets or recipt as capital or loans taken.	It is yhe amount realised by sale of goods and/or rendering of services.
2.	it is shown in balance sheet.	it is shown in trading account or profit and loss account.
3.	Capital Recipts are normally of non-recurring nature.	Revenue Receipts are normally of recurring nature.
4.	Capita Reciepts are the receipts which are not received in course of normal business activities.	Revenue Receipts are received in the course of normal trading operations.
5.	Capital Receipts are normally not available for payment as profit to the owner of the business.	Revenue Receipts, i.e, net of revenue expenses and expired portion of Capital Expenditure Revenue Exependiture are available to the owner of the business.

Capital Expenditure: Any expenditure which is incurred in acquiring or increasing the value of a fixed asset is termed as capital expenditure. As such, the amount spent on the purchase of Land and Building, Plant and Machinery, Furniture etc. is capital expenditure. Such expenditure yields benefit over a long period and hence is written in Assets. Following are the examples of capital expenditure.

1. Expenditure which results in the acquisition of a fixed asset such as land, building, plant, motor vehicles, trade marks, etc. Such asset would be used in the business for a number of years.
2. Expenditure in connection with the purchase or erection of a fixed asset such as wages paid to workers for erecting machines, cartage paid on acquiring plant and machinery, over-hauling of second-hand machines etc.
3. Expenditure which results in the extension or improvement of fixed assets and which increases the earning capacity of such assets such as amount spent on increasing the seating capacity of a cinema hall.
4. All amount spent upto the point an asset is put to use is treated as capital expenditure. Thus, legal fees and brokerage paid to acquire a property and interest paid on loans taken to acquire the asset for the period before the asset is put to use is capital expenditure and is added to the cost of such asset. But interest on loan for the period after the asset is put to use is treated as revenue expenditure.
5. Expenditure incurred for establishing the business, e.g., the cost of a patent, preliminary expenses, goodwill etc.
6. VI.Interest on capital upto the point production is ready to commence or during the period of formation of company.
7. VII.Expenditure incurred on the purchase of second-hand asset and on putting such asset into working condition.

Revenue Expenditure: Any expenditure, the benefit of which is received during the current year itself is termed as revenue expenditure. As such, all the revenue expenditures are debited to Trading and Profit & Loss Account. Such expenditure does not result in an increase in the earning capacity of the business but only helps in maintaining the existing earning capacity. Examples are:

1. Expenses incurred for the purpose of day to day running of business such as manufacturing expenses, office expenses, selling expenses etc.
2. Expenses incurred on the ordinary repairs and maintenance of fixed assets, white-washing of building etc.
3. Payment for goods purchased for resale.
4. Depreciation on fixed assets.
5. Purchase of raw materials for converting it into finished goods.
6. Interest on loan and interest on capital for the period after the asset is put to use.
7. Replacement of worn-out part of an existing machine.
8. Loss from sale of fixed assets.

	Basis of Distinction	Capital Expenditure	Revenue Expenditure
1	Purpose	it is incurred for the acquisition or erection of a fixed asset for use in bussiness.	it is incurred for the day-to-day running of the business.
2	Earning capacity	it increases the earning capacity of the business.	it is incurred for maintaining the earning capacity.
3	period	its benefit extendsto more than one year.	its benefit is exhaused within a maximum period of one year.
4	Accounting Treatment	it is debited to related Asset Account.	it is debitedto related Expenses Account.
5	Nature Account	of it is real account.	it is a nominal account.