receipt and payment
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Capital and Revenue – Receipts and Payments
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Chapter 10
Capital and Revenue – Receipts and Payments
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Capital and Revenue – Receipts and Payments
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CAHPTER AT A GLANCE (Chapter 10)10.01 Expenditure and Expense10.02 Income and Receipts10.03 Capital Expenditure and Revenue Expenditure10.04 Capital Receipt and Revenue Receipt10.05 Capital Profit (Capital Income) and Revenue Profit
(Revenue Income)10.06 Capital Loss and Revenue Loss10.07 Meaning of Deferred Revenue Expenditure
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10.01 Expenditure and ExpenseExpense Expense refers to the part of the cost outlay (or expenditure) which is consumed in the process of earning revenue in an accounting period. In other words, expenses are the cost of the use of
things or services for the purpose of generating revenue.
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10.01 Expenditure and ExpenseExpense Examples are payment of salaries, wages, rent, etc. Expenses decrease owner’s equity. For accounting purpose, an expense is recorded in the
period in which it is incurred, i.e., when the corresponding benefit is consumed or used
up or has expired and not during the period when it is actually paid in
terms of money.
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10.01 Expenditure and ExpenseExpenditure The term Expenditure, in financial accounting, is synonymous with ‘cost’. Expenditure is the amount spent or liability incurred
for the value received. Expenditure or cost means the sacrifice measured in
term of money, incurred for the acquisition of a benefit.
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10.01 Expenditure and ExpenseExpenditureThus, expenditure involves sacrifice whether in cash or in kind which can be measured in terms of money and the acquisition of a benefit corresponding to the sacrifice made.
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10.01 Expenditure and ExpenseExpenditure Cost is the measure of expenditure. It may be expired or unexpired. Expired Cost (or Expense) is that part of the expenditure which has been consumed during the current accounting period. It decreases equity. Unexpired Cost is that part of the expenditure which
has not been consumed till the end of the accounting period.
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10.02 INCOME AND RECEIPTIncome Income refers to excess of revenue over expense. It is a net result of transactions entered into by the
enterprise during the accounting period. It results in increase in wealth (by profit earning) of a
business. Income may be due to cash as well as, non-cash transactions because of the accrual concept of accounting.
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10.02 INCOME AND RECEIPTReceipt Receipt refers to inflow, i.e., receipt of cash as a result
of a transaction. Unlike income, it does not affect profit of the business.ExampleAmount received towards capital contribution.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURECapital Expenditure Capital Expenditure is the amount spent by an enterprise on purchase of fixed assets that are used in
the business to earn income and are not intended for resale.
Capital expenditure gives a long-term benefit to the business.
Capital Expenditure normally yields benefit over a period extending beyond the accounting period.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURERevenue Expenditure Revenue Expenditure is the expense incurred on running of a business. In short expenditure, which is not capital expenditure
is revenue expenditure. The benefit of revenue expenditure is exhausted within the accounting period
in which it is incurred.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURERevenue Expenditure that becomes Capital Expenditure Expenses incurred on the repairs and whitewashing for
the first time on the purchase of an old building, since these expenses are necessary to make the building usable.
Wages paid to workers to produce a tool to be used by the factory itself or to fix a machine.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURERevenue Expenditure that becomes Capital Expenditure Expenses incurred in connection with the purchase of
land or building, such as fees paid to the lawyer or registration expenses.
Interest on loan raised to acquire an asset up to the point of time it is ready for use.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURERevenue Expenditure that becomes Capital Expenditure Materials and stores used in the construction of fixed
assets. Transport charges are generally of a revenue nature,
but transport charges incurred for a new plant or machinery are expenditure of capital nature and are added to the cost of asset.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITUREIMPROPER CONSIDERATIONS IN THE DETERMINATION OF CAPITAL EXPENDITURE AND REVENUE EXPENDITURE An Amount of Payment Payment—Periodic or Lump-sum Source of Payment Its Nature in the Hands of Recipient
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURENECESSITY FOR DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE The distinction affects the measurement of profit as
well as the valuation of assets in the Balance Sheet. Accrual basis of accounting requires a clear distinction
between Capital Expenditure and Revenue Expenditure. Capital Expenditure results in the acquisition of fixed
assets, whereas Revenue Expenditure represents the expenditure incurred in the business.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURENECESSITY FOR DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE The accounting treatment of Capital Expenditure and
Revenue Expenditure is different. Capital Expenditure appears in the Balance Sheet as an asset, whereas
Revenue Expenditure appears in the debit side of the Trading and Profit and Loss Account as an expense.
Capital Expenditure increases the earning capacity of a business. But Revenue Expenditure maintains that.
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10.03 CAPITAL EXPENDITURE AND REVENUE EXPENDITURENECESSITY FOR DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE Capital Expenditure may add to the value of an existing
asset, on the other hand, Revenue Expenditure can decrease the value of net assets.
Most of the Capital Expenditure becomes Revenue Expenditure (e.g., charging depreciation on fixed
assets).
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10.04 CAPITAL RECEIPT AND REVENUE RECEIPTCapital Receipts Capital Receipts are the receipts which are not
obtained in course of normal business activities. Example
(i) capital contributed by the owner(s), (ii) secured or unsecured loans taken and (iii) receipts from the sale of fixed assets and non- current investments.
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10.04 CAPITAL RECEIPT AND REVENUE RECEIPTCapital Receipts Capital receipts do not necessarily imply a surplus or
gain because there is often an associated book value of a fixed asset to be adjusted. Capital receipt is taken to the Balance Sheet
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10.04 CAPITAL RECEIPT AND REVENUE RECEIPTRevenue Receipts Revenue Receipts are those receipts which arise from
the conduct of the business. An important feature of revenue receipt is that the
amount received is not to be refunded to anyone. If it is to be returned to anyone, it does not remain a
revenue receipt.
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10.04 CAPITAL RECEIPT AND REVENUE RECEIPTRevenue Receipts Revenue receipts may range from selling chocolates, to
a fee for services rendered by a professional person, to an admission fee received by a theatre, to discount received and rent received.
Such income is in relation to goods or services being currently supplied and therefore, should be recorded in the Trading and Profit and Loss Account.
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10.05 CAPITAL PROFIT (CAPITAL INCOME) AND REVENUE PROFIT (REVENUE INCOME)Capital profit It is a profit earned on the sale of a fixed asset or on
raising capital (i.e., premium on issue of shares or debentures) and redeeming long-term liabilities (e.g.,
redemption of debentures or preference shares). It is to be noted that when a fixed asset is sold then the excess of sale proceeds over the cost price of fixed
asset will be the capital profit, the difference of cost price and written down value of the asset represents a revenue profit
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10.05 CAPITAL PROFIT (CAPITAL INCOME) AND REVENUE PROFIT (REVENUE INCOME)Capital profit Capital profits should not be transferred to the Profit
and Loss Account but to Capital Reserve. Capital Reserve appears on the liability side of the Balance Sheet.
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10.05 CAPITAL PROFIT (CAPITAL INCOME) AND REVENUE PROFIT (REVENUE INCOME)Revenue profits It is on the other hand, are profits earned by trading,
e.g., profit on sale of goods, discount received, commission earned, rent received, etc. Such profits are taken to Profit and Loss Account.
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10.06 CAPITAL LOSS AND REVENUE LOSSCapital losses These are those losses which occur on selling fixed asset or raising share capital. Example If investment having an original cost of Rs.3,00,000 is
sold for Rs.2,60,000; there will be a capital loss of Rs 40,000.
Capital loss should not be debited to Profit and Loss Account but may be shown on the assets side of the Balance Sheet.
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10.06 CAPITAL LOSS AND REVENUE LOSSCapital losses If, however, capital losses are large, the common practice is to spread them over a number of years and charge a proportionate amount being charged to Profit and Loss Account and the balance being carried forward as an asset to be written off in coming years. If the amount of such loss is small, they are usually debited to Profit and Loss Account of the year in which they occur. When capital profits arise, these capital losses are set off against them.
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10.06 CAPITAL LOSS AND REVENUE LOSSCapital losses When capital profits arise, these capital losses are set
off against them.
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10.06 CAPITAL LOSS AND REVENUE LOSSRevenue losses These are those losses which arise during the normal
course of business, i.e., in trading operations such as loss on the sale of goods.
Revenue losses are debited to Profit and Loss Account. The term ‘Revenue Loss’ is similar to the term ‘Revenue Expenditure’ in a respect that it is also charged to the Profit and Loss Account like Revenue Expenditure.
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