Revenue Account and Capital Account Explanation
In the world of commerce, the two words ‘capital’ and ‘revenue’ are among the fundamental concepts. These concepts form the basis of the economy of a nation.
From observing our country's financial position, it is important to draw certain conclusions regarding revenue collections and the corresponding expenditure as it determines the country's financial health.
Before we dive deep into such an analysis, it is important to understand the concepts of ‘capital’ and ‘revenue.'
Capital refers to the liquid assets (generally in the form of cash) that are procured by a company to be used for its expenses. This is a general idea of capital, but if we expand its definition under financial economics, the capital that is held by a company is also known as its capital assets.
Revenue, on the other hand, refers to the income that is generated by a company/business in the form of discounts or deductions for the goods returned. Revenue comprises the overall income of a business or the gross income where business operations costs have not been considered. The deduction of costs from revenue shall reveal the net income of a business.
So, now that we know the meaning of capital and revenue, the next question here is, how do these affect the economy of a nation? The answer to this lies under the notion of Revenue Account and Capital Account.
The revenue account and capital account were established to understand the national income and expenditure better. Let's get to know about them in detail.
What is a Revenue Account?
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As revenue includes the income earned by a business, a revenue account is essentially an account that contains the receipts of this income. Such an account includes the income from the operations in hand.
Let us consider the government like a business. Now, just like a common business, the government also generates income by carrying out various operations. In this case, these operations include
Revenue from Tax: Tax revenues from taxes on imports and productions that can be both the direct revenue and indirect revenue.
Direct Tax Revenue: Such revenue is generated when the government receives income tax and corporate tax.
Indirect Tax Revenue: Such revenue is generated through service tax, excise duties, and custom export and import duties.
Revenue from Sources Other than Tax: While tax revenue makes the major portion of income for the government, other sources such as profits from public sector industries, interests of investments, dividends, and certain penalties or fees are known as non-tax revenue.
Did You know?
Corporate gains are taxed twice. A corporation's profits are taxed two times- first as corporate tax and second as a tax on dividends.
A revenue account keeps a record of all such revenues collected by the government and represents the nation's gross income.
What is a Capital Account?
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The second type of account associated with the government is the Capital account. As the name suggests, a capital account holds the record of the capital assets and liabilities related to the government. It includes payments and capital receipts of the government.
So, what could be the assets and liabilities of the government? To put it simply, they are similar to any other business. The capital of a business is the money or liquid assets it generates throughout its operation. So, for the government, this asset is generated from
Capital generated from Public loans or Market loans
T-Bills or Treasury Bills that refer to the finances borrowed from banks
Other loans that are sanctioned by foreign government or institutions outside the country
Capital may also be generated from withdrawing or deduction of public sector/unit investments.
As every business face liability as debt, the government also has certain liabilities in the form of pension payments, government bills or bonds, or the payment of goods and services that the government has acquired but has not paid for yet.
Both the government assets as well as liabilities are accounted for in the Capital account. This account keeps a record of the nation's total assets and liabilities during a single financial year and the net change in both of them. The account balance of a capital account decides whether a country is an apparent exporter or importer of capital.
Terminologies Related to Capital Account
Voucher: It refers to any written documentation in favor of the entries reported in account books and helps in indicating the accuracy of the transaction’s accounting.
Financial Accounting: it is a particular type of accounting that considers a method of summarising, documenting, and reporting the transactions that arise due to business operations.
Tender: itis an offer formulated to perform some task or to provide goods at a certain fixed price.
Escalator Clause or Escalation Clause: these clauses refer to the provisions made by the company that allows for an automatic increase in the wages or prices of their employees or products.
Financial Structure: it refers to the way in which the firm’s assets are actually financed.
Coopetition: it refers to the combination of competition and cooperation between companies.
What is Capital Expense?
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A capital expense or capital expenditure refers to the government's amount of cost or a business organization for buying assets. The assets bought through capital funds are fixed assets such as machinery, equipment or property, etc.
Buying and selling assets is an integral part of running a business. It is useful in expanding the business operation to build future capital and secure financial assets for future use.
For a government, capital expense means enhancing the assets and reducing liabilities. It can do so in the form of loan repayment where the loan represents a liability, and hence by repaying the loan, the government cuts down liability.
What are the Examples of Capital Expenditure?
Capital expenditure refers to an expenditure that acquires a capital asset. The examples of capital expenditure are
Expenditure made for the acquisition of fixed assets like land, building, machinery, furniture, motor vehicle, workspace, and more comes under capital expenses.
Expenditure made for improving or extending the fixed assets, that is, furniture, machinery, and workspace, for example, increasing the seating capacity of a theatre comes under capital expenditure.
Expenditure made to bring the fixed assets to the place of their use and expenditure made on the installation of required machinery or on erection such as freight on fixed assets, wages paid for installation, and others are also counted under capital expense.
Expenditure invested for the purchase of intangible assets such as goodwill, patent rights, trademarks, copyright, and more are also a part of capital expense.
Expenditure made for reconditioning or renovation of old fixed assets such as money spent on repairing or overhealing of secondhand machinery comes under capital expense.
Money spent on major repairs and replacement of plants that increase the efficiency of the plant is also counted in capital expense.
The cost paid for shifting a plant from one place to another place is also a part of capital expenditure.
What is Revenue Expense?
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An idea that goes hand-in-hand with the capital expense is Revenue expense or revenue expenditure. Revenue expenditure includes the costs incurred by a business that works as current expenses, i.e., these costs are not incurred as a means of asset creation or removal of liabilities.
The government's revenue expenses are made in the form of payment of salaries and wages, grants, advertising, rent or costs of sold goods, etc.
While the concepts of capital expense and revenue expense may seem similar at first glance, there is a significant difference between the two.
Difference between Capital Expense and Revenue Expense
FAQs on Revenue Account and Capital Account
1. What is the difference between revenue and expenditure?
Revenue is the record of income generated by an organization through discounts or deductions as a means of making money during a given time. It does not include the costs endured by the business. On the other hand, expenditure is the total amount spent by an organization for its operation, such as rent, insurance or advertising, etc. Revenue and expenses are useful in denoting a business or an organization's financial health and are included under the income statement of a company. By reducing expenditures from revenue, we can calculate the net income. Thus, revenue is the gross income, while expenditures represent the costs of business operation.
2. What are the examples of capital expenditure of the government?
The government's capital expenditure comprises costs of creating assets such as schools, colleges, bridges, roads, hospitals, railway lines, dams, airports, etc. Another form of capital expenditure of the government can be by reducing its liabilities such as repayment of loans, cutting down on the investments in public units or public sectors, etc. Capital expenditure is always associated with the creation of fixed assets by the government. The government may modulate such expenditures by either creating new assets by purchasing or selling or reducing the liabilities or debt accumulated. The creation of fixed assets under capital expenditure also leads to a depreciation of the value of these assets over time.
3. What is the difference between a revenue budget and a capital budget?
The revenue budget contains items that do not lead to any change in the assets or the liabilities of a company whereas the capital budget contains those items that cause a change in the assets or the liabilities of the government. Revenue receipts and revenue expenditure is contained in a budget whereas capital receipts and capital expenditure is contained in a capital budget. Revenue budget generally includes those revenue and expenditure that are generated in the day-to-day life of an individual while capital budget includes items that are long-term in nature.
4. Which type of account is a capital account?
A capital account is a type of natural personal account, that is, the account that records transactions with a person or group of persons. These accounts necessarily record credit transactions. The capital accounts can be of 3 major types, that is, natural persons, artificial or legal persons, and representative personal accounts. Natural persons’ personal account refers to an account that records transactions with an individual. Firms’ accounts or companies’ accounts are a type of artificial or legal persons’ account. These accounts record the transactions made with an artificial person who might be created by law. A representative personal account is the one that indirectly represents a certain person or persons, that is, in the case of similar accounts, the accounts can be grouped into one head, and then a representative account can be opened.
5. What do you mean by revenue deficit?
Revenue deficit refers to a condition of an individual when his/ her realized net income is less than the net income that is projected. Revenue deficit generally happens in situations where the actual amount of revenue does not correspond to the budgeted revenue and the actual amount of expenditure does not correspond to the budgeted expenditure. Revenue deficit creates a condition wherein the income of the individual is not enough to cover their basic operations. In order to overcome the revenue deficit of a company, the company can take measures like cutting down variable costs like materials and labor.