CAPITAL & REVENUE

EXPENDITURE & RECEIPTS

CAPITAL & REVENUE EXPENDITURE

Its very important to differentiate between capital and revenue expenditure. Because Only revenue expenditure relates to income & expenditure statement.

DIFFIRENT TEST FOR CAPITAL & REVENUE EXPENDITURE

PURCHASING AN ASSETS
EXPENDITURE INCURRED IN THE INITIATOIN PERIOD OF BENEFITS

PRINCIPAL OF EARNING CAPACITY

EXTENSION OF BUSINESS

PURCHASING AN ASSETS
If an fixed asset is purchased then amount

spend is called capital expenditure.

If an floating asset is purchased then amount

spend is called capital expenditure.

EXAMPLE OF ICE CREAM

MACHINE OF ICE CREAM IS CAPITAL EXPENDITURE

EXAMPLE OF ICE CREAM

CONES OF ICE CREAM IS REVENUE

EXPENDITURE

PERIOD OF BENEFITS
If an

expenditure gives you benefit for a longer period more than one year then it is called capital expenditure. expenditure gives you benefit for a shorter period less than one year then it is called revenue expenditure.

If an

EXPENDITURE INCURRED IN THE INITIATOIN

All the expenditure made at the initiation of

the business is a capital expenditure. Because these are not incurred for earning profit. They are incurred for setting the profit earning.

EXAMPLE
Legal fee pay to advisor for drafting a partnership

deed it is a capital expenditure.

Because it is done and incurred at the starting

time of business

Extension of Business
Expenses incurred on extension of business are

capital expenditures.
Any expense that increase income of business

called capital expenditure.

But the expenses incurred that increases the

earning capacity of business called revenue expenditures.

EXAMPLE OF BUILDING
Purchase a plot for extension of plant is capital

Expenditure

Principal of earning capacity

If any expense that increase the earning

capacity of business it is a capital expenditure.

But if it does not increase the earning capacity

but maintain the earning capacity is called revenue expenditures.

EXAMPLE OF REPLACEMENT OF MACHINERY

Replacement of worm out part of machinery is

Revenue Expenditure

Purchase new device which increase output of

machinery is Capital Expenditure

 Above we discuss the capital &

revenue expenditures.
Now we will discuss capital & revenue receipts

Sale of an assets
If a fixed asset sold the amount received is

Capital receipts and it is non-taxable.

If floating asset is sold the amount received

Revenue receipts and it is taxable

EXAMPLE
Cone ice cream man sells cones(Revenue)

If he sells ice cream machine(capital receipt)

Amount received on account of a Right

If a owner of a right, sells his right completely

forever by receiving an amount that amount is a capital receipt.

If gives his right temporary, then the amount

received is revenue receipt.

EXAMPLE
If a person has trademark of Dreamcast if he sells

it completely its amount is capital receipt

Substitution of source of income

Amount received in substitution of source of income is a capital receipt. But if it is substitution of income alone, it is revenue receipt.

Receipt to be judged in the hand of recipients

While differentiating either is it revenue or

capital receipt, it should be judged from the view of receipient.

It should not be considered from the point of

view of buyer,otherwise it will confused your judgment.

EXAMPLE
If a legal practitioner received fee for drafting a

partnership deed it is called revenue receipts.

Lump-sum receipt
If amount is received in lump sum, it does not

mean that it is a capital receipt because it is in huge size but it maybe revenue receipt on other hand. If amount received in installment, it is not necessary that it is a revenue receipt because it has a small figure but this maybe a capital receipt.

EXAMPLE
If a person has a business of garments

But he sells 1st and last time Cameras the profit

from this activity is called capital receipts.

Isolated transactions
The motive behind the transaction is very

important if the motive is to start new business in future and to earn profit it is called revenue receipt.
If motive is to do that transaction for very first time and very last time or to invest his surplus amount as saving then it is a capital receipt.

EXAMPLE
Mr Ali sell its trade mark for Rs 10,00,000 and

amount received in 20 equal installments the amount received is called capital receipts.

The size of transaction does not matter.