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BBA/BCOM 2 All right are reserved with CU-IDOL Basic Accounting Course Code: BBA/BCOM 101 Semester: First SLM Unit: 8 E-Lesson: 7 www.cuidol.in Unit 8(BBA /BCOM-101)

BASIC ACCOUNTING 33 OBJECTIVES INTRODUCTION To make students aware of the basic concepts of In this unit we are going to learn about the Capital & Revenue Items. Capital & Revenue Items and its concept of applicability. To develop an understanding of methods of Accounting of Capital & Revenue Items and its Under this you will learn and understand the relevance for companies. accounting methods of Capital & Revenue Items . To make students understand the methods of Accounting for Capital & Revenue Items. In this unit you will learn the scope & . compliance of Capital & Revenue Items . www.cuidol.in Unit 8(BBAA/B/BCCOOMM-101) INSTITUTE OF ADIllSTrAigNhCtEaAreNDreOseNrLvIeNdE wLEitAhRCNUIN-IGDOL

Topics To Be Covered 4  Introduction  Meaning of Capital & Revenue Items  Meaning of Capital Expenditure & Receipt  Meaning of Revenue Expenditure & Receipt  Difference between Capital & Revenue Items  Accounting Treatment of Capital & Revenue Items www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Concept of Expenditure 5  The use of goods and services in order to earn revenue is the expense.  Hendriksen opines, \"expenses are the using or consuming of goods and services in the process of obtaining revenues\".  \"Expense is the expired cost, directly or indirectly related to given fiscal period, of the flow of goods or services into the market and of related operations.\" www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Expenditure  Expenditure incurred during the fiscal period and related to 6 same accounting period becomes an expense i.e. expired All right are reserved with CU-IDOL cost of that period.  Expenditure incurred during the previous accounting period but related to current accounting period becomes an expense i.e. expired cost of the current accounting period e.g. prepaid expenses.  Expenditure related to the current accounting period but not paid becomes outstanding expenses. Unit 8(BBA /BCOM-101) www.cuidol.in

Expenditure 7 Expenditure is usually of two types: (a) Capital expenditure; and (b) Revenue expenditure. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital and Revenue 8 Expenditures Increases operating efficiency or adds to capacity? Capital Expenditure Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 8 (Debit fixed asset account) www.cuidol.in

Capital and Revenue Expenditures 9 Increases operating Increases useful life efficiency or adds to (extraordinary repairs)? capacity? Capital Expenditure Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL (Debit fixed asset account) www.cuidol.in

Capital and Revenue 10 Expenditures Increases operating Increases useful life Revenue Expenditure efficiency or adds to (extraordinary repairs)? (Debit expense account capacity? for ordinary maintenance and repairs) Capital Expenditure Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL (Debit fixed asset account) www.cuidol.in

Capital and Revenue 11 Expenditures CAPITAL EXPENDITURES ASSETS \\ 1. Initial cost 2. Additions 3. Betterments 4. Extraordinary repairs www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital and Revenue Expenditures 12 CAPITAL EXPENDITURES ASSETS REVENUE EXPENDITURES EXPENSES Normal and ordinary repairs and maintenance www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

13 Key words indicating Capital Key words indicating Revenue expenditure expenditure Enhance Repair Upgrade Maintain Extend Replace Improve Like-for-like Remedial Renew www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital Expenditure 14  Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods.  It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset.  These are not meant for sale.  Expenditure incurred for improving assets and extending an existing asset is also capital expenditure. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital Expenditure 15  The sum of invoice price, freight and insurance charges, installation and erection cost and custom duty etc. will be capitalized in the books of a firm.  These capital items appear on the assets side of Balance Sheet. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital Expenditure Includes 16  Capital Expenditure may include the following:  Purchase costs (less any discount received)  Delivery costs  Legal charges  Installation costs  Up gradation costs  Replacement costs  As capDitaelbeitxpenditure results in increase in the fixed aFsisxeetdoAf sthseetesntity, the accounting entry is as follows: - Credit Cash/Payable www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 16

Capital Expenditure - Examples 17  Interest on capital paid during the period of construction of Company (u/s 208 of Indian Companies Act)  Expenditure in connection with or incidental to the purchase or installation of an asset.  Acquisition of new assets.  Expenditure incurred for putting the old asset purchased, into working condition.  Additions and extensions to existing assets.  Interest and financing charges paid, brokerage and commission paid.  Betterment of fixed assets or improvement of an asset to produce more, to improve its earning capacity or to reduce its operating expenses or to increase the life of asset. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital Expenditure - 18 Examples  The cost of assets will be written off by way of depreciation over a period of its life.  The amount of depreciation is a revenue expenditure and is debited to profit and loss account.  The reason for charging depreciation to revenue i.e. profit and loss account is that the asset is used for earning revenue.  Hence the depreciation is charged to profit and loss account.  Thus, the benefit of capital expenditure does not exhaust in one year but extends over a number of years of its use or life of the asset. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 18

Capital Expenditures 19 Examples  Cost of goodwill.  Cost of freehold land and building and the legal charges incurred in this connection.  Cost of lease.  Cost of machineries, plants, tools, fixtures, etc.  Cost of trade marks, patents, copy rights, designs, etc.  Cost of car, lorry etc.  Cost of installation of lights and fans. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 19

Capital Expenditures 20 Examples  Cost of any other assets acquired by way of equipment.  Erection cost of plant and machinery.  Cost of addition to existing assets.  Structural improvements and alteration in the existing assets.  Expenses for developments in case of mines and plantations.  Expenses for administration incurred during construction and equipment of any industrial enterprise.  Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 20

Revenue Expenditure 21  Revenue expenditure consists of expenditure incurred in one period of the accounting, the full benefit of which is enjoyed in that period only.  This does not increase the earning capacity of the business but it is incurred in order to maintain the existing earning capacity of the business.  It includes all expenses which arise in normal course of business.  The benefit of such expenditure is for a short period, say, one year only and it is not to be carried forward to the next year.  The expenditure is of a recurring nature i.e. incurred every year. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Revenue Expenditure Include 22 Revenue costs therefore comprise of the following:  Repair costs  Maintenance charges  Repainting costs  Renewal expenses www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 22

Revenue Expenditure Examples 23  Wages or salaries paid to factory workers.  Machine Oil to lubricate.  Electricity or Power required to run machinery or motor.  Expenditure incurred in the ordinary conduct and administration of business, i.e. rent, , carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.  Repair and maintenance expenses incurred on fixed assets. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Revenue Expenditure Examples 24  Cost of saleable goods.  Depreciation of fixed assets used in the business.  Interest on borrowed money.  Freight, cartage, octroi duty, transportation, insurance paid on saleable goods.  Petrol or diesel consumed in motor vehicles.  Service charges to motor vehicles.  Bad debts. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Revenue Expenditure - Examples 25  Purchase of raw materials for conversion into finished goods.  Selling and distribution expenses incurred for sale of finished goods e.g. sales office expenses, delivery expenses, advertisement charges, et(%  Establishment expenses like salaries, wages, rent, rates, taxes, insurance, depreciation on office equipment.  Depreciation of plant, machinery and equipment.  Expenses incurred in order to maintain the existing fixed assets in an efficient and workable state such' as repairs to building, repairs to plant, white-washing and painting of building. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Revenue Expenditure 26 All these items appear on the debit side of trading and profit and loss account, in case of trading concerns or income and expenditure account, in case of non-trading concerns. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 26

Revenue v/s Capital expenditure 27 Revenue Expenditure Capital Expenditure  Its effect is temporary, i.e. the benefit is received  Its effect is long-term, i.e. it is not exhausted within the within the accounting year. 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 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.  This expenditure helps to maintain the business.  It does not occur again and again. It is nonrecurring and irregular.  This expenditure improves the position of the business. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital & Revenue Receipt 28 The primary difference between Capital Receipts vs Revenue Receipts is that Capital receipts are the receipts of non-recurring nature which either creates the liability of the company or reduces the company’s assets whereas revenue receipts are the receipts of recurring nature and are reported in the statement of income of the company. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Capital Receipt 29  Capital receipts are those receipts which either create liability or reduce an asset. Capital Receipts, as mentioned above, are non-recurring in nature. And these sorts of receipts are also not received every now and then.  All of the capital receipts are free from taxation unless there is a provision to tax it. Various types of Gifts and loans are the types of the capital receipts that do not attract tax and are tax-free. So, in addition to non-recurring, Capital receipts are those non-routine receipts which either becomes a load and responsibility or cause a vivid depletion in the assets of the government or any organization and business www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Types of Capital Receipt Types of Capital Receipts 30 Capital Receipts can be classified into three types. 1. Borrowing funds When a company takes loans from banks or financial institutions, then it would be called borrowing funds. Borrowing funds from a financial institution is one of three forms of capital receipts. 2. Recovery of loans To recover loans, often the company needs to set aside one part of assets which reduces the value of assets. This is the second type of capital receipts. 3. Other Capital Receipts There’s a third type of receipts which we call “other capital receipts”. Under this, we include disinvestment and small savings. Disinvestment means selling off one part of the business. Disinvestment is called capital receipt because it reduced the asset of the company. Small savings are called capital receipts because they create a liability for the business. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Examples of Capital Receipts 31 The following sources are the generators of the capital receipt: Additional capital and mentioned assets introduced by the owner or the possessor Debentures and the other issues of debt instruments Loans borrowed from a bank or from a financial institution . Various insurance Claims. Issue of Shares www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Revenue Receipt 32 Revenue Receipts are those receipts that neither reduce the assets of the company nor they create any liability. They are always recurring in nature and they are earned during the normal course of business.  From the definition, it is clear that any type of receipt needs to satisfy one of the two conditions to be called as revenue receipt –  First, it must not reduce the assets of the company.  Second, it must not create any liability for the company.  Revenue receipts are recurring receipts and their effect is shown on the income statement. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Features of Revenue Receipt 33 • Means for survival: A business starts its operations because it expects to receive money as a result of their service to their customers. Either they can sell a bunch of products or they can offer services. No matter what they do, without revenue receipts, they can’t survive for long. Because revenue receipts are collected from the direct operations of the business. • Applicable for short term: Revenue receipts are money received for a short period of time. The benefit of revenue receipts can only be enjoyed for one accounting year and not more. • Recurring: Since revenue receipts offer benefits for a short period of time, it’s imperative that the revenue receipts should be recurring. If revenue receipts don’t recur, the business wouldn’t be able to perpetuate for long. • Affects the profit/loss: Receiving revenue directly affects the profit/loss of the business . When the revenue is received, either profit is increased or loss is decreased. • A small amount (volume): Compared to capital receipts, the number of revenue receipts is usually smaller. That doesn’t mean all revenue receipts are smaller. For example, if a company sells 1 million products in a given year, the revenue receipts could be huge and could also be more than its capital receipts during the year. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Examples of Revenue Receipts 34 The following sources are the generators of the capital receipt: The sale of any kind of an inventory Income from services rendered Different types of discount Received from the suppliers Sale of scrap Interest received Rent received Dividend Received www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

35 Deferred Revenue expenditure means essentially a revenue expenditure but the benefit of which is received over a period of more than one year. Examples : 1.Heavy research expenditure 2. Heavy advertisement expenditure www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Deferred Revenue Expenditure 36 Deferred Revenue Expenses are those expenses, the benefit of which may be extended to a number of years, say, 3 to 5 years. These are to be charged to profit and loss account, over a period of 3 to 5 years depending upon the benefit accrued.  Sometimes losses may be suffered of an exceptional nature  e.g. loss of an asset (uninsured) due to accident or fire; confiscation of property in a foreign country etc.  The amount which has not been debited to the profit and loss account of the current year is shown in the balance sheet on the assets side and it is known as fictitious asset. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 36

Purpose of Distinction 37  Profit and Loss Account is debited with revenue expenditure and credited with revenue income (i.e. sales income and from other sources).  If the revenue income is higher than revenue expenditure, it will be a profit and if it is less than revenue expenditure, it will be a loss.  Capital expenditure is shown on the assets side of Balance Sheet. Capital and liabilities are shown on the liabilities side of Balance Sheet.  The purpose of distinction is to give \"True and fair\" view of the accounts and financial position of the firm. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 37

Capital expenditure is treated as 38 revenue expenditure  Value of fixed asset is understated  Net profit is understated www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 38

Revenue expenditure is 39 treated as capital expenditure  Value off Fixed asset is overstated  Net profit is overstated www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL 39

Multiple Choice Questions 40 1.Which one is the Capital Expenditure? [a] Capital invested by the owner [b] Selling expense for machine [c] Machine purchased [d] Daily expenses to operate business 2. Capital expenditure – i. Car purchased for sale ii. Machine purchased for business use iii. Road tax and insurance premium of delivery van Which one is correct of the following? [a] i & ii [b] ii & iii [c] i & iii [d] i, ii & iii 3. Sale of machine of machine merchandising business – [a] Capital receipt [b] Capital income [c] Revenue income [d] Revenue receipt Answers: 1.[c] 2.[b] 3.[d] Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL www.cuidol.in

SUMMARY 41  Expenditure :- expenses are the using or consuming of goods and services in the process of obtaining revenues\". Expense is the expired cost, directly or indirectly related to given fiscal period, of the flow of goods or services into the market and of related operations.\"  Capital Expenditure-Capital expenditure consists of expenditure, the benefit of which is not fully enjoyed in one accounting period but spread over several accounting periods. It includes assets acquired for the purpose of earning income or increasing the earning capacity of the business or effecting economy in the operation of an asset.  Revenue Expenditure:- Revenue expenditure consists of expenditure incurred in one period of the accounting, the full benefit of which is enjoyed in that period only  Deferred Revenue :-Deferred revenue expenditure means essentially a revenue expenditure but the benefit of which is received over a period of more than one year. www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

Frequently Asked Questions 42 Q .1 How do capital and revenue expenditures differ? Ans :-The differences between capital expenditures and revenue expenditures include whether the purchases will be used over the long-term or short-term. Revenue expenditures are typically referred to as ongoing operating expenses . Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period. Q.2 What is a revenue expenditure? Ans: A revenue expenditure is a cost that will be an expense in the accounting period when the expenditure takes place. Revenue expenditures are often discussed in the context of fixed assets. The revenue expenditures take place after a fixed asset had been put into service and simply keeps the asset in working order. Q.3 Is there a difference between an expense and an expenditure? Ans : An expense is reported on the income statement in the period in which the cost matches the related sales, has expired, was used up, or had no future value. An expenditure is a payment or disbursement. A company makes an expenditure of Rs 255,500 to purchase equipment. The expenditure occurs on a single day and the equipment is immediately placed in service. Assuming the equipment will be used for seven years, the asset's cost could be reported on the income statement as depreciation expense of Rs.100 per day for the next 2,555 days (7 years of use). www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL

REFERENCES 43 1. Arulanandam and Raman, Advanced Accountancy, Himalaya Publication House Pvt. Ltd., Edition 2018. 2. Dr. Vishwanathan Reddy and Jayaram Kanzal, Corporate Accounting, Himalaya Publication House Pvt. Ltd., Edition 2019 3. Dr. S.N. Maheswari, Financial Accounting, Vikas Publication, Edition 2017. 4. S.P. Jain and K.L. Narang, Financial Accounting, Kalyani Publication, Edition 2018Saxena, Rajan. (2010). Marketing Management. New Delhi: Tata McGraw Hill Education Pvt. Ltd. www.cuidol.in Unit 8(BBA /BCOM-101) 4A3ll right are reserved with CU-IDOL

44 THANK YOU For queries Email: [email protected] www.cuidol.in Unit 8(BBA /BCOM-101) All right are reserved with CU-IDOL