Capital and Revenue Items

Each and every business needs to have its Final accounts settled. These Final accounts consist of mainly two things: Balance Sheet and Income statement. To ascertain the results of business transactions for an accounting year, an Income statement is produced and to determine the financial position, a Balance sheet is produced. When the Capital and Revenue Items are not classified accordingly, it will affect the profits, fair performance and financial position of the Business. From a taxation point of view, the Capital and revenue item profits are taxed differently. So, it is important to classify the Capital and Revenue Items. 

Capital and Revenue Items

Capital Items: 

The items which have long term effects on business - generally more than a year. It is also defined as items that are considered as long-give assets of a firm or items that occupy the assets section in a balance sheet called Capital Items. Examples of capital Items are Fixed assets such as lands, buildings, legal rights and tangible and intangible assets.

Revenue Items:

The items which have short term effects on business - generally less than a year. Revenue is the amount the company gets by selling its goods and services to the customers. Examples of revenue items are repairs, wages, salaries, etc..

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Classification of Capital and Revenue Items

Capital Expenditure:

It is defined as when the expenditures benefit is available longer - more than a year is considered as Capital Expenditure. It includes expenditures in many forms. Some of it is through a building, machinery, lands, office equipment, and so on. Fixed assets of the company are acquired to incur the expenditure. There can be a capital addition to the fixed assets which can increase the efficiency of the assets.

The results of any expenditure incurred on the fixed assets are an increase in its life sustainability and revenue earning capacities in the form of an increase in its production. It reduces the production cost and increases the sales of the firm. For the cost of the results of the experiment in the acquisition of the patent rights, if the experiments are not successful, it is treated as a Deferred revenue expense.

Capital Receipt:

Capital Receipt is the amount received as fixed assets, investments, loans, issues of shares and compensations from the accidents of assets. These are also called incoming cash flow. These increased the assets and reduced the liability of the company. These kinds of receipts won't affect the overall profit or loss of an organization/company. 

Capital Profit and Loss:

The profits that are earned through capital items are called the capital profit and the loss that is incurred on the capital items is called a capital loss. Examples of capital profits are an increase in the values of assets through revaluation and the profit from the sale of debentures, sales on premium.

Some examples of capital loss are Loss on the sale of the fixed assets, the losses incurred on the debentures, and sales issued at a discount. These are shown as fictitious assets in balance sheets.

Revenue Expenditure:

It is defined as the expenditure benefits available shortly. In general, less than a year is called Revenue expenditure. The overall expenditure that is incurred during the business is referred to as Revenue Expenditure. It includes the expenditures incurred in business such as rent, insurance, electricity, salary, insurance and so on. The expense that occurs from buying the goods and raw material, renewal of buildings. Legal charges are incurred in defending a suit for damage. 

Revenue Receipt:

The receipts or the income that arises from a day to day business activities. These are shown in the income statement. These generally include the amount received from through routine incomes, sales of goods and fees received from the services provided by the business

These directly affect the profit and loss of the business and are recurring in nature. In general, it doesn’t reduce any assets and it won’t create any liability. It increases the revenue of the company and is a source of cash flow. The balance sheet is not involved during disclosure and is made under trading, profit or loss account.

Revenue Profit and Loss:

Revenue profits are normally earned by business through commission received, discount received, and rent received, etc. Revenue losses are those that occur due to Fraud of employees, theft of goods, loss from selling the goods, and bad debts.

Fun Facts

The business transactions are noted in detail and a systematic order is to ascertain the result of the accounting year and financial position of a date. If the benefits are found less than a year, it is called a revenue expense. If it is available for more than a year, it is called capital expenditure.

FAQ (Frequently Asked Questions)

Q1. How are the Business Transactions Classified?

Ans: In order to successfully survive in the present corporate world, a business organization must have a complete understanding of the accounting and auditing aspects that are involved in the trade. Business transactions play a vital role in the entire study of accounting. Business transactions are classified into two types, mainly capital and revenue items. When the items have long term effects on business more than a year it is called capital items and when the items have short term effects on the business these are called revenue items. These are the two foremost business transaction classifications that we need to be aware of.

Q2. Do Loan and Capital Receipts Come Under Capital or Revenue Expense?

Ans: When a business organization spends money to acquire specific fixed assets, the cost incurred is deemed as capital expenditure. On the other hand, various other formats of recurring expenses in the form of salary payment, advertising expenses, repairs and maintenance fall under the category of revenue expenses. Revenue expenses are incurred at a particular time period and are recurring in nature. The tax receipts are a prime example of revenue expenditure as they are recurring in nature. Whereas the repayment of loans is a capital expenditure in nature as it leads to the reduction in liabilities of the government. 

Q3. How are Revenue Profit and Loss Occur?

Ans: Revenue profits are normally earned by business through commission received, discount received, and rent received, etc. Revenue losses are those that occur due to Fraud of employees, theft of goods, loss from selling the goods and bad debts.