Presentation on Revenue and Capital Expenses on Income

1. PRESENTATION ON
CAPITALAND REVENUE
EXPENDITURE AND INCOME
PRESENTED BY:
MANSI RASTOGI
Asija & Associates Chartered Accountants

2. CAPITAL EXPENDITURE
 Results in the acquisition or construction of fixed assets.
 Generates enduring benefits.
 Helps in revenue generation over more then one
accounting period.
 Placed on the asset side of the Balance Sheet.
 Transferred to P&L account of the year on the basis of
utilization of that benefits in particular accounting year.
Eg: Construction of building
Asija & Associates Chartered Accountants

3. REVENUE EXPENDITURE
 Relates to the operation of the business of an accounting
period.
 Benefits of these expenditure do not extend beyond the
period for which it was incurred.
 Incurred for the purpose of the organisation’s daily
activities, service/trade
 To maintain fixed assets.
 Shown in P&L as their benefits are for one accounting
period.
Eg: Repair and maintenance of building
Asija & Associates Chartered Accountants

4. CONSIDERATIONS IN DETERMINING
CAPITAL & REVENUE EXPENDITURE
 Nature of Business: For a trader dealing in furniture purchase of
furniture is revenue expenditure .
 Recurring nature of expenditure: expenses recurring often in an
accounting year are revenue expenditure while expenses of non
recurring nature are capital expenditure
 Purpose of expenditure: Repair of building is of revenue nature
while construction of room is capital expenditure.
Asija & Associates Chartered Accountants

5. CONSIDERATIONS IN DETERMINING
CAPITAL & REVENUE EXPENDITURE
 Effect on revenue generating capacity of the business:
 Generate income in current period
 Should be matched with the revenue earned in the current period.
 Help to generate revenue for more then 1 accounting period are
capital expenditure.
 Materiality of the amount involved:
 Relative proportion of amount involved is also an important
consideration.
 Even if expenditure does not increase the productive capacity, it
may be capitalized due to the amount involved
 An expenditure may increase the asset value yet not capitalized due
to the amount involved. Asija & Associates Chartered Accountants

6. DISTINCTION BETWEEN
CAPITAL & REVENUE EXPENDITURE
Capital expenditure Revenue expenditure
 Contributes to the revenue
earning capacity of a business
over more then one accounting
year.
 These are placed on the asset
side of the balance sheet
 Incurred to purchase fixed
asset
E.g. Construction of building
 Revenue expenses are
incurred to generate revenue
for a particular accounting
year.
 These are recorded in P&L
account.
 Incurred to maintain fixed
asset.
E.g. White wash of building.
Asija & Associates Chartered Accountants

7. DEFERRED REVENUE
EXPENDITURE
 Those expenses, the benefit of which may be extended to a
number of years, say, 3 to 5 years. These are to be
charged to profit and loss account, over a period of 3 to 5
years depending upon the benefit accrued.
 Unless deferred revenue expenditure are not written off ,
this is shown on the assets side of the balance sheet under
the head “MISCELLANEOUS EXPENDITURE”
Eg: Expense on advertisement
Asija & Associates Chartered Accountants

8. DISTINCTION BETWEEN
DEFFERED & PRE-PAID EXPENDITURE
Deferred revenue expenditure Prepaid expenditure
 The benefits of deferred revenue
expenses cannot be precisely
estimated
 Heavy advertising to launch a new
product is a deferred revenue
expenditure since its benefits are
available over next 3-5 years but
one cannot say precisely how long
the benefits will b available and the
exact amount of benefits.
 The benefits of prepaid expenses
can be precisely estimated
 Insurance premium paid for the
year ending 30thJune,2006when
the accounting year ends on 31st
March,2006 will be an example of
prepaid expenses to the extent of 3
months period i.e. 1st April,2006 to
30th June,2006.
Asija & Associates Chartered Accountants

9. CAPITAL INCOME
 Receipts which are not obtained in course of normal
business activities are revenue receipts that is receipts
which are not revenue in nature are capital receipts.
 Eg:Receipts from sale of fixed assets or investments,
secured or unsecured loans, owners, contribution etc.
 Capital receipts are not directly credited to P&L account
Asija & Associates Chartered Accountants

10. REVENUE INCOME
 Receipts which are obtained in course of normal business
activities are revenue receipts.
 Revenue receipts are credited to P&L Account.
 Eg: Receipts from sale of goods or services, interest
income.
Asija & Associates Chartered Accountants

11. THANK YOU
Asija & Associates Chartered Accountants