mazher accounting - l9 CAPITAL AND REVENUE (EXPENDITURE AND...

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Unformatted text preview: l9 CAPITAL AND REVENUE (EXPENDITURE AND RECEIPTS) 19.1 INTRODUCTION _ You have learnt in the previous lessons how transactions and events in a business concern are recorded and classified in its books of accounts. You have also learnt the preparation of Trial Balance. A businessman is interested to know5the net result of his business operations after a certain period. But neither the trial balance nor thebooks of accounts reveal the net results of the business. For this, certain financial statements are prepared. These financial statements are termed as Trading and Profit and Loss Account and Balance Sheet. But before you learnhow to prepare these statementsi it is all the more necessary to know about the nature of expenditure and receipts i.e. capital and revenue. This will help in recording correctly the items in these statements. - ' In this lesson, we shall study about Capital and Revenue Expenditure as well as Capital and Revenue Receipts. - i 19.2 OBJECTIVES After studying this lesson, you wilI be able to: - enumerate the different items of expenditure; 0 : cite the examples of expenditure which results in acquisition of asset ' or man increase‘in earning capacity of business; - infer the meaning and salient features of capital and revenue expenditure; I (xiv) ._ Entenainnrmt "'. ‘ aegis-Th; amuse amass} iii 'EQEQ’LiSe—ifiia; " " o I ; distinguish between capital and revenue expenditure; _ I I classify receints into capital and revenue receipts; I' - calculate the cost of goods sold on the basis 'of - given information. 19.3 DIFFERENT ITEMS 0F_'EXPENDITURE Before you learn about different items of expenditure, you should be clear about the terms ‘expenditure‘ and ‘expense’. As you know, several payments are 'made in businessfi-crn time td'time. If the utility of payment is availed during the same accounting year, it is called an ‘expense’and if it'is availed for more than one year, it is. called fexpenditure’. ' ' In business, there are thousands of items of expenditure. The following are some of these expenditures which are generally incurred in all types of business: - ‘ Expenditure or}: ' (i) - Purchase o'f‘goods r 7 7 (ii) ' Purchase of fixed assets such as Building, Furniture,'Machine, Etc. '. (iii)_ t Carriage inwards ' (iv) Wages 5 (v) Octroi _ I (Vi) Purchase of Raw Material. I i ‘ (vii) , import duty 1 _' V . (viii) Goal, gas-water, oil; grease,- fu'el, heating and lighting .(ix) _ Wages paid to Workers for installation of machinery (x) — Salaries ‘ r ' (xi). 7 Rent, rates and taxes I ' '_ ' (xii) " ' Stationery and priniirigj 7i.- - (xiii) Poéta'ge Telegraer? ‘ " (xv) '- A Repairs and renewals ' (xvi) Depreciation on fixed assets (xvii) 7 Office expenses I I ‘. “ .' - r. I IV V r r - ' .. ' _ i 1 “Ceme and {new}: 3433 (xviii) Bank charges (xix) General expenses (xx) Travelling expenses - .' (m) Overhaulingcf second hand machinery purchased 7 . (xxii) Major rcpairs afi'ected for reconditioning a machinery/the old assets (xxiii) increasing the seating-capacity of a cinema hall - I (xxiv) Constructing an additional room ‘ (XXV) Carriage for bringing a fixed asset to place of business (xxvi) Shifting business to convenient premises. ' (mii) Advertisement on introducing a new product in market. (Jerviii) Replacement of hand driven machine by automatic machine. (xxvix) Research and development Note: The ab‘ove iist of examples of expenditures is not exhaustive. Types of expenditure Expenditure can be classified into three categories: i. 7 Capital Expenditure, r 2 Revenue Expenditnre. and 3. Deferred Revenue Expenditure. 1. Capital Expenditure / / The expenditure incurred for acquiring a fixed asset or which results a in increasing the earning capacity of the business is known as Capital Expenditure. The benefits of capital expenditures are generally availed in several accounting years. Following are some of the examples of Capital Expenditure. You may find some of these examples in the list- given on page 22. ‘ (i) ExPenditurc incurred for theeequisition of a fixed asset e.g. building, furniture, machinery etc. (ii) Expenditure incurred for the inwardcarriage or erection of a fixed asset ag. carriage paid in connection with the purchase of fixed asset; wages paid to labourers in connection with the - installation of machinery, etc. These expenses form part of the cost of the fixed asset. ‘ 434 :: Mountain)! W _ (iii) Expenditure incurred for extension or‘ improvement of an existing fixed .. asset e.g.‘ money spent in connection with increasing the seating capacity of a cinema hall or constructing an additional room. (iv) Expenditure incurred for the major repairs of an old asset-cg. repairs. for reconditioning a machinery. ' (v) Expenditure incurred for the replacement of an old asset with a new asset e.g. replacing a hand-driven machine by automatic machine. 2. Revenue Expenditure An expenditure incurred in the course of regular business transactions of a concern is availed during the same accounting year is known .as Revenue Expenditure. Following are some of the examples of Revenue Expenditure. You may find examples in the list given on page No. 22 and 23. (i) Expenditure incurred on the purchase of raw materials. (ii)_ I Expenditure incurred in. the day-dosday running of business, e.g. wages, salaries, rent, rates and taxes, ofiice expenses, interest, discount etc. ' ' (iii) Expenditure incurred for the upkeep of an asset e.g. repairs, maintenance charges, etc. ' _ (iv) Expenditure incurred for the prchase of goods meant for sale e.g. purchases, carriage inwards, import duty, octroi, etc. (iv) Depreciation of fixed assets. The above examples are not exhaustive and are not universally accepted. Whether an expenditure is capital expenditure or revenue expenditure depends upon its purpose and nature of the business. For example, amount spent on the purchase of furniture is a capital expenditure but it is a revenue expenditure for a. business dealing in furniture. Similarly, amount spent on Plant and-a Machinery is a capital expenditure but it is a revenue expenditure for a business dealing in engineering goods. In the same way, amount spent on wages or carriage are revenue expenditure, but when Wages are paid for the installation of a new machinery or carriage paid to bring'the machine to the place of business, they are capital expenditure as they increase the value of fixed asset i.e. machinery here. ' ' ' ‘ f A - v . quite! and Revenue 3435 3. Deferred revenue expenditure There are certain revenue expenditures that are incurred during one accounting year but are appiicable wholly or in part in future periods such as heavy expenditure on advertisement for introducing a new product in the market or for exploring new markets for the product.» These expenditures appear to be revenue expenditure. But it is not so because the benefit from this is likely to the enjoyed over a number of years. Such expenditure whose benefit is enjoyed not in one year but over a number of years is known as deferred revenue expenditure. 7 ' Following are some of the exampies of Deferred Revenue Expenditure: (i) Heavy initial expenditure incurred on Advertisement for introducing a product in the market. (ii) (iii) INTEXT QUESTIONS 19.1 Expenditure incurred in shifiing business to a more convenient premises. Expenditure incurred-on research and development. A. Classify the folldfififi" expenditure under' Capital, Revenue and ‘ Deferred Revenue Expenditure by putting a Tick Mark ( Ni ) in correct column: Capital Revenue Expenditure Expenditure . Salaries . Legal Charges 7 . Wages fbr installing a machinery . Depreciation 7 . Repairs of furniture purchased second hand 6. Advertisement for introducing a new product ‘ 7. Carriage paid on goods purchased 8. Research & Development expenditure 9. Expenditure on dismantling and V reinstallation of Plant 10. Office expenses ~ ll. Expenditure on the construction of an additional room 12. Maintenance charges of building Deerred Revenue E - - ' Expenditure MAWNF-‘I 436 :: Accouurqney M B. ' Fiil in the blanks with appropriate type of expenditure: (i) I Amount spent on purchase of fixed assets is expenditure. ' (ii) Expenditure incurred in the course of regular business transactions of a concern is expenditure. '(iii) Expenditure incurred for replacing an old asset with a new asset is expenditure. (iv) Amount spent on purchase of goods for sale is expenditure. _(v) An expenditfi‘re of revenue nature whose benefits are availed over a number of years is expenditure. W 19.4 DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURE ' You have studied about capital and revenue expenditure in the previous section I v a II o and now you Wlii be able to make distinction between the two. Foilowmg are the main points of difference between capital-find revenue expenditures. Basis of 7 Capital Revenue Difference Expenditure _ Expenditure 1. Purpose It is incurred for the It is incurred for the purchase of fixed assets maintenance of fixed assets. 2. Earning It increases the earning It does not increase the Capacity capacity of the business. earning capacity of the business. 3. Periodicity Its benefits are spread Its benefit is only forum of benefit over a number of years. accounting year. 4- Placement in It is an item of Balance It is an item of Trading and financial Sheet and is shown as Profit and Loss Account statenients an asset. and is shown on the debit side of either of the two. 5. Occurrence of It is non-recurring :It is us 13 a recurring expenditure in nature. expendi uré. WWI—"#— ' ._ - Carpan and Revenue :: 437 __._________________________ . INTEXT QUESTIONS 19.2 _ . State whether the foilowing statements are true or'i'alse: (a) Capital expenditure is non-recurring in nature. .(b) Revenue expenditure is incurred to acquire a fixed asset. (c) Capital expenditure heips to maintain a business. ((1) Revenue expenditure is non-recurring in nature. (e) Capital expenditure is incurred for increasing the earning capacity of ' a business. (f) The. purpose of revenue expenditure is to maintain a business. (g). The benefits of capitai expenditure are spread over a number of years; (h) Capital expenditure is incurred for ei‘ficient conduct of a'business. (i) Revenue expenditure is an item of Trading and Profit and Loss Account. (j) Revenue expenditure increases the earning capacity of ‘a business. was 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 nonnal course of business are known as Capital Receipts. Some examples of Capital Receipts are: (a) Receipts‘fiom sale of fixed assets. (b) Additional capital introduced by the Proprietor (c) Loans raised 2_. Reuenue Receipts The receipts which arise out of normal course of a business are known . l , ~ ____ l. 438 :: Accountancy _ as Revenue Receipts. Some examples oi‘ Revenue Receipts are I: - (a) Income from sale of goods (b) Rent received form letting out the business property (c) Dividend received from shares (d) Interest received from investments INTEXT QUESTIONS 19.3 State whether the following receipts are of Capital or Revenue nautre: (i) Sale of goods (ii) Money received as loan from a bank 7 ‘ {iii} Interest received from deposits ,(iv) Dividend received .from securities (v) Sale _of machinery (vi) Rent received from a tenant (vii) Money received from preprictor as additional capital (viii) Amountreceived from public as deposit (ix) Amouan received from the issue of shares - (x) Money received from the sale of furniture 19.6 COST OF GOODS SOLD In a trading concern, the main activity of business is purchasing the goods - and seliing them. In order to fix the soiling price of the goods, the businessman should know the cost of that goods. Cost of goods sold equals the price of goods purchased plus the expenses incurred in bringing the goods to the place of sale. For example, if goods are purchased at a price of Rs.l,000 and additional expenses, say Rs.100 are incurred for bringing the goods to the place of sale, then the total cost of goods sold is Rs.l,1(}0 if the entire goods are sold. If some of the goods are available in the beginning of the year and some of goods remain unsold at the close of year, the cost of goods sold is calculated as under: a _ ‘ I ' Capitol and Revenue It: 439 W Cost of goods sold : Opening Stock '- + Net Purchases + All expenses incurred on Purchases Closing Stock Example : 1 Sanjay Brothers deal in Readymade Garments. Calculate the cost of goods sold from the information given below: Amount (Rs) Opening stock of garments 10,000 Closing stock of garments - 8,000 Purchases made , 1,00,000 Carriage on purchase 2,000 Wages paid to workers to keep the garments in store ‘ 4,000 Rent ofithe shop ‘ 1,000 Office Clerk’s Salaries 3,000 Office Printing and Stationery 400 Saiesman’s salaries 4,000 Solution Cost of Goods Sold = .Opening stock + Net Purchases + Expenses incurred on purchases — Closing stock Amount (R3,) Opening Stock 10,000 + Purchases 7 1,00,000 m - Closing Stock 7 8,000 1,02,000 + All expenses incurred to bring the purchase upto store Carriage on purchases 2,000 Wages paid to workers- to keep the garments in store 4,000 Cost of Goods Sold 1,08,000 W 440 :: Annual-c)! - ' ~ I Example 2 Calculate the cost of goods_ sold from the information given below: Amount (115.) Opening stock . 20,000 Closing stock , I 18,000 Purchases ' ' 85,000 Carriage on purchases 2,300 Carriage on 53005 3,000 Office Rent ' ' 5,000 Sales 1 ,40,000 Wages paid Ito keep the goods in'the godown _ 3,000 Fin-chases Returns - _ 5,000 Solution Cost of Goods Sold = Opening stock 7 20,000 '+ Purchases 85,000 ,- Returns 7 5,000 Net Purchaseg—F 80,000 100,000 - Closing stock ' ‘ 18,000 ' 82,000 + All expenses incurred to bring I the goods to godown Carriage on Purchase 2,300 ‘ ' Wages paid 3,000 ' 5,300 Cost of Goods Sold 87,300 a _ Capital and Revenue :: 441 INTEXT QUESTIONS 19.4 Which of the following equations is true and which is false? Write ‘T' against true equation and ‘F’ against false equation: ‘ Cost of goods sold is equal to : - (a) Opening stock‘+ closing-stock - cost of net purchases-7.7L all expenses ' incurred to bring purchases to business. (b) Opening stock + cost of net purchases - closing stock +i all expenses incurred to bring purchases to business. (c) Closing stock - opening stock + cost of net purchases + all expenses incurred to bring purchase to business (d) Closing stock + opening stock + cost of net purchases - all expenses incurred to bring purchases to business. (e) Cost of net purchases + opening stock + cost of net purchases - all expenses incurred to bring purchases to business. 19.7 WHAT YOU HAVE LEARNT 1. Expenditure : refers to cash payments or deferred payments. 2. Expense: refers to expenditure whose benefitis enjoyed in the same accounting year in which it is_incurred. 3. Capital Expenditure: is incurred in acquiring, extending or improving fixed assets. 4. . Revenue Expendituretiticludes all expenditure incurred in the course of regular business transactions. 5. ‘ Deferred Revenue Expenditure: is a heavy expenditure of revenue ' nature and the benefits of which last for a long iime. 6. Capital Expenditure: is non-recurring, spread over a number of years, increases the earning capacity of the business whereas revenue expenditure is resuming, benefits during one accounting year and is routine expenditure. ' 7. Capital Receipt: is a receipt that does not arise in the normal course of business. '442 :: Accouutluq_ W 8. 19.8 Revenue Receipt: is a receipt that'arises in the course of regular running of the business. ' ' Cost of goods sold: includes opening stock plus net purchases minus - closing stock plus the cost of all the expenditure incurred to bring the purchases to the place of business. TERMINAL QUESTIONS What is meant by the, terms ‘expenditure" and ‘cxpense‘? (30—30 words) What is Capital Expenditure? Explain with examples. (30—50 worlds) What is Revenue Expenditure? Explain with examples. (30—50 words) Distinguish between Capital Expendtiure and Revneue Expenditure. {30—50 words) What is meant by deferred revenue expenditure? Explain with suitable examples. (30-50 Words). ' What are Capital and Revneue receipts? Explain with examples. (50— 70 words). ' Which of the following expenditures are Capital, Revenue and Deferred Revenue Expenditure? ' a) Wages paid to workers of a factory. b) Wages paid to workers for installation of a machine. c) Cost of repairs to an old building pruehases. d) Heavy initial advertisement for a new product. e) Cost of constructing an additional mom.- 1) Cost of replacement of a wom—out part. Capital cud-Rama: .1443 : i l t 8. Caluclate the cost of goods sold from the inforniation given below: . Amount (Rs) Opening Stock ' 10,000 Closing stock 8,000 _ Purheases 80,000 Carriage on purchases . - 200 Wages to labourers for taking the I goods to store 100 Purhcases Returns 1,000 Sales _1 ,00,000 Carraige on sales ' 400 Salray to Salesman I 1,200 9. Calculate the cost of ' goods sold from the following information. Amount (Rs) Stool: on 1.1.97 - 15,000 Sales during the year ‘ 1,35,000 Sales Returns A 10,000 Pruchases during the year 80,000 Carriage inwards ‘ _ _ 2,000 Purchases Returns 4,000 Wages to workers ' ‘ 5,000 Stock on 31.12.97 1 13.000 10. ' The follwoing information is given in respect of M/s Sanjay Brothers as on 31st March, 1997. Amount (Rs) Stock on January 1, 1997 5,000 Purchases made during 3 months 30,000 Purhcascs Returns . 2,000 Sales made during 3 months 50,000 Amount spent on carriage on purcliases 5,000 Stock on.3lst. March, 197 10,000 Calculate cost of goods sold from the above information. , , u.” .mwfl—W a 444:.- Amuutaucy . . . I] ~_ 19.9 ANSWERS To INTEXT QUESTIONS 19.1 A. Capital Expenditure 3,5,9,11, Revenue Expenditure 1,2,4,7,10,12 Deferred Revenue Expenditure 6.8 B. i) Capital _ ii) Revenue '7 iii) Capital iv) Revenue v) Deferred Revenue 19-: True (3): (c): (e): (D: False ' (b): (d)- (h) '0') 19.3 Revneue (i), (iii), (iv), (vi) Capital {ii}, (v), (vii), Mia), (ix), (x) 19.4 True (b). (6) False (a), (C). (d) ...
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This note was uploaded on 10/01/2010 for the course RDS ECon530 taught by Professor Musharaftalpur during the Spring '10 term at University of Karachi.

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mazher accounting - l9 CAPITAL AND REVENUE (EXPENDITURE AND...

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