Revenue Account and Capital Account

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Revenue Account and Capital Account Explanation and their Differences

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:

  1. 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.

  1. 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 the 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.

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 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

Capital Expense

Revenue Expense

Expenditures made to create assets for the government are known as capital expenses.

Expenditures made for the routine operation of an organization/government's activities are known as revenue expenses.

Such expenses are for long-term use, such as acquiring fixed assets.

Such expenses are made to fulfill a short-term goal.

The capital expenditures depreciate with time.

Revenue expenditures do not depreciate with time as they are charged at one go.

FAQ (Frequently Asked Questions)

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 of costs of creating assets such as schools, colleges, bridges, roads, hospitals, railway lines, dams, airports, etc. Another form of capital expenditure of government can be of 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.