Page 43 - DMGT104_FINANCIAL_ACCOUNTING

Unit 2: Principles of Accounting

Following are the main points of difference between capital and revenue expenditures. Notes
Table 2.1: Distinction between Capital and Revenue Expenditure

Basis of Difference Capital Expenditure Revenue Expenditure
Purpose It is incurred for the It is incurred for the maintenance
purchase of fixed assets. of fixed assets.
Earning capacity It increases the earning It does not increase the earning
capacity of the business. capacity of the business.
Periodicity of benefit Its benefits are spread over a Its benefit is only for one
number of years. accounting year.
Placement in financial It is an item of Balance Sheet It is an item of Trading and Profit
statements and is shown as an asset. and Loss Account and is shown on
the debit side of either of the two.
Occurrence It is non-recurring It is usually a recurring
expenditure in nature. expenditure.

2.3.2 Capital and Revenue Receipts

Just as expenditures are classified into Capital or Revenue Expenditure, in the same way receipts
are classified into:
1. Capital Receipts, and
2. Revenue Receipts.
1. Capital Receipts: The receipts which do not arise out of normal course of business are
known as Capital Receipts. These do not effect profit/loss of business. They either increase
liability or reduces the asset.

Example:
1. Receipts from sale of fixed assets.
2. Additional capital introduced by the Proprietor.
3. Loans raised.

2. Revenue Receipts: The receipts which arise out of normal course of a business are known
as Revenue Receipts. These are shown on credit side of P/L account.

Example:
1. Income from sale of goods.
2. Rent received form letting out the business property.
3. Dividend received from shares.

4. Interest received from investment.

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