Capital & Revenue

Income Expenditure
INCOME
Capital Income: Which does not grow from the
running business.
•Eg sale of FA at a price above book value.
•Capital profit is transferred to capital reserves.
Revenue Income: Which arises out of and in the
course of regular business transactions.
•Eg. Sale of goods, rent received from business
property.
•Revenue income is credited to the Profit & Loss
Expenditure
1. Capital Expenditure Exp. which is incurred for
obtaining a long – term advantage for the business. It
may be:
a)For acquiring a long – term asset
b)Which results in increasing the earning capacity of
business.
 Eg. Which does not relate to the running of business.
 Eg. Wages paid for installation of machinery
 Eg. Expenditure for acquiring a copy right
2. Revenue Expenditure: An expenditure which arises
out of and in the course of regular business
transactions
Eg. salary, Purchases.
3. Deferred Revenue Expenditure: It is that class of
revenue expenditure which is incurred during an
accounting period , but is applicable either wholly or
partly to future periods. It may be:
1. Expenditure wholly paid in advanced where no service
has been rendered – eg. Office rent in advances.
2. Eg. Partly paid in advance, when a part of benefit has
been derived during that period and the balance is
unused. Eg. Advertising expenditure for developing a
new market.
3. Eg. Which may be more of an asset – eg. Development
for discount on debentures.
4. Amount representing losses of an exceptional return –
of – heavy loss of non-issued assets.
Capital / Revenue?
1.IInd hand car purchased for Rs.20000
2.Rs. 1000 spent on Factory painting
3.Freight on purchase of new machinery Rs.10000
Provisions &
Reserves

• Provisions: Provisions means any

amount written off or retained by way
of providing depreciation or reduction
in the value of assets or for providing
any known liabilities of which the
amount cannot be determined with
substantial accuracy.
Provisions are defined in As – 29
Provisions are amounts set aside out of profits and other
surpluses for –

a)Depreciation
b)Fall in value of assets eg. Debtors
c) Any known liability the anti of which is not determined
with accuracy – eg income tax.

Examples
1. Provision for Doubtful Debts
2. Provision for Repairs & Re
3. Provision for Discount on Debtors
4. Provision for Discount on Creditors
5. Provision for Income tax.
A provision is usually created by debiting to the Profit and
Loss account and showing it on the liability side of B/S or
as a deduction from assets in the B/S.
Provision is a charge against profits.
Creation of provision decrease the proprietor is funds in
the business.
Reserves

• The term reserves means – “that portion

of earnings receipts or other surplus of
an enterprise (whether capital or
revenue) appropriated by the
management for a general or specific
purpose other than a provision for
depreciation or diminution is the value of
assets or for a known liability
Reserve is an appreciation of profits
Creation of reserve increase proprietor ‘s funds.
Reserve Funds
1.Revenue Reserves: which are created out of revenue
profits of the business.
a) Specific Reserves – for specific purpose
b) General Reserves – only to strengthen the financial
position of the business and to make availability of
funds.
2. Capital Reserves – which are created out of capital
profits of the business of – profit on sale of FA
Profit on issue of shares / deb
Profit on redemption of
share/ deb

3. Secret Reserves – The existence of which does not

appear on the fore of B/S, In such a situation, Net Assets
position of the business is stranger than that disclosed by
B/S