Golden Rules for Debit and Credit:

1. Personal Accounts –

a) Debit the receiver b) Credit the giver

2. Real Accounts –

a) Debit what comes in b) Credit what goes out

3. Nominal Accounts –

a) Debit all expenses and losses b) Credit all incomes and gains

DEBIT – Expenditure, Loses, Assets

CREDIT – Gain, Profit, reciepts/revenue, Liabilities

sundry debtors – are customers-- personal account – hence debit side

sundry creditors – suppliers – personal account – hence credit side
return inwards, Carriage Inward – credit side

Comparison Chart
 BASIS FOR
TRIAL BALANCE BALANCE SHEET
COMPARISON
Trial Balance is the list of all The Balance sheet is the statement which
Meaning balances of General Ledger shows the assets, equity and liabilities of the
Account. company.
Division Debit and Credit columns Assets and equity & liabilities heads
Stock Opening stock is considered. Closing stock is considered.
Part of Financial
No Yes
Statement
To check the arithmetical
To ascertain the financial position of the
Objective accuracy in recording and
company on a particular date.
posting.
Personal, real and nominal
Balances Personal and real account are shown.
account are shown.
At the end of each month,
Preparation quarter, half year or financial At the end of the financial year.
year.
Use Internal Use External Use

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Trial Balance Balance Sheet

It is prepared to verify the arithmetical 1 It is prepared to disclose the true
1 accuracy of books of accounts financial position of the business

It is prepared with balances of all the 2 It is prepared with the balances of

2
ledger accounts assets and liabilities accounts.
3 It is not a part of final accounts 3 It is an important part of final accounts.
It is prepared before the preparation of 4 It is prepared after the preparation of
4
final accounts trading and profit and loss account.
It may be prepared a number of time in 5 It is generally prepared once at the end
5
an accounting year. of accounting year.
Generally, it includes opening stock but 6 It always includes closing stock but not
6
not closing stock. opening stock.
There is no rule for arranging the ledger 7 Assets and liabilities must be shown in
7
balances in it. it according to the rule of marshaling.
8 It is not required to be filed to anybody. 8 It must be filed with the registrar of
companies if the business is a
 company.
9 Auditor need not to sign it. 9 Auditor must sign it.

Comparison Chart
BASIS FOR
FIXED ASSETS CURRENT ASSETS
COMPARISON
Fixed assets are the long terms assets Current assets refers to those resources
which are acquired by the entity for the which a company owns for being traded
Meaning
purpose of continuing use, to generate and are held for not longer than one
income. year.
Convertibility Not easily convertible into cash. Readily convertible into cash.
Holding period More than a year Less than a year
Cost or market value whichever is
Valuation Cost less depreciation
lower.
Long term funds are used for financing Short term funds are used for financing
Financing
fixed assets. current assets.
Pledge Cannot be pledged Can be pledged
Charge Creation of fixed charge. Creation of floating charge.
Sale of asset Will result in capital profit or loss. Will result in revenue profit or loss.
Not created at all.
Revaluation reserve Created when the value is appreciated.

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Fixed assets are long-term, tangible assets such as land, equipment, buildings, furniture
and vehicles. Fixed assets are parts of the company that help with production and are
components that last over time in the company. They are physical assets that can be
seen. They are not used for liquidation purposes to contain debt within a business or
cashed out in any way to aid a business financially.

Current assets A current asset is cash or any asset that can be reasonably converted to cash
within one year.
are the general inventory of a company, including
cash,

accounts receivable,

insurance claims,

investments,

pre paid expenses,

markeatable securities
inventory
and intangible or non-physical items. Current assets account for the worth of a
company, showing the earnings-to-debt ratio by the year's end. Each current asset has
the ability to be cashed out to financially help the business or liquidated to save the
company from debt or bankruptcy.

Fixed and current assets are recorded on a balance sheet, which is a statement showing
the worth of a company at a certain point in time. The balance sheet shows the
company's spending habits and inventory compared to its income. This helps the
company determine where to cut back expenses and how to plan future budgets.

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Comparison Chart
 BASIS FOR
TRADE DISCOUNT CASH DISCOUNT
COMPARISON
A discount given by the seller to the A deduction in the amount of invoice
Meaning buyer as a deduction in the list price of allowed by the seller to the buyer in
the commodity is trade discount. goods or services is cash discount.
Purpose To facilitate a bulk sales. To facilitate a prompt payment.
Allowed to all
Yes No
customers
Entry in books No Yes
When allowed? At the time of purchase. At the time of payment.

Prompt -- the time limit for the payment of an account, stated on a prompt note.

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for difference between cash discount and trade discount refer pdf page no 63

Comparison Chart
BASIS FOR
CAPITAL EXPENDITURE REVENUE EXPENDITURE
COMPARISON
The expenditure incurred in acquiring a capital Expenses incurred in regulating
Meaning asset or improving the capacity of an existing day to day activities of the
one, resulting in the extension in its life years. business.
Term Long Term Short Term
Capitalization Yes No
Shown in Income Statement & Balance Sheet Income Statement
Outlay Non-recurring Recurring
Benefit More than one year Only in current accounting year
Earning capacity Seeks to improve earning capacity Maintain earning capacity
Matching concept Not matched with capital receipts Matched with revenue receipts

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Comparison Chart
BASIS FOR
GROSS PROFIT OPERATING PROFIT NET PROFIT
COMPARISON
Gross Profit is the income Operating Profit is the Net Profit is the residual
of the company left after income of the company left income left with the
Meaning
paying off the direct after paying off operating company after all
expenses. expenses. deductions.
A rough estimate about To know how well the To know the actual profit
Objective the company's company is allocating its made in a particular
profitability. resources on expenses. accounting year.
Helpful in knowing the
Helpful in eliminating
Helpful in controlling performance of the
Advantage unnecessary operating
excess costs. company in a financial
expenses.
year.

Gross Profit
The word Gross means “before any deductions”. This implies that the profit before
any deductions is called the Gross profit. It is also called “Sales Profit“.

Net Profit
The word Net means “after all deductions”. This implies that profit after all
deductions is called Net Profit. It is also called “Net Income” & “Net Earnings”. It is
the difference between total revenue earned and total cost incurred.

Gross
Net
Profit
Profit
1 It is the excess of net sales 1 It is the excess of gross profit over all
over cost of purchase or indirect expenses.
manufacture (all expense
relating to purchase or
manufacture of goods) of
goods.
2 It is not true profit of the 2 It is true profit of the business.
business
3 It shows credit balance of the 3 It shows credit balance of the profit
 trading account
4 The progress of the business
can be judged by the
comparison of gross profit
with net sales
and loss account.
4 The profitability of the business can
be measured by the comparison of
net profit with net sales.

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Comparison Chart
BASIS FOR PROFIT AND LOSS
BALANCE SHEET
COMPARISON ACCOUNT
Account that shows the
A statement that shows company's assets,
Meaning company's revenue and expenses
liabilities and equity at a specific date.
over a period of time.
What is it? Statement Account
Profit earned or loss suffered by
Financial position of the business on a
Represents business for the accounting
particular date.
period
Preparation Prepared on the last day of financial year. Prepared for the financial year.
Information Income, expenses, gains and
Assets, liabilities, and capital of shareholders.
Disclosed losses.
Accounts shown in the Balance Sheet do not Accounts transferred to Profit
Accounts lose their identity, rather their balance is carry and Loss account are closed and
forward to next year as opening balance. cease to exist.
It is prepared after the preparation of Profit & It is prepared before the
Sequence
Loss Account. preparation of Balance Sheet.

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Receipts and Income and
Payments Expenditure
Account Account

1 It is a summarized 1 It is the account of revenue income and

statement of all cash revenue expenditure of an accounting year.
transactions during an
accounting year.
2 Only cash transactions 2 It is not confined to, cash transactions only,
are recorded here. i.e. non-cash transactions are also included in
it.
3 The portion of income 3 The whole amount of income or expenditure—
or expenditure which whether received or paid in cash or not—is
has been received or recorded in it.
paid in cash this year,
is recorded here
4 Transactions involving 4 All expenditures are recorded on Debit side and
cash receipts are all incomes on Credit side.
recorded on Debit side
and those involving
cash payments are
recorded on Credit side.
5 Transactions—both 5 Only revenue transactions are recorded here.
capital and revenue-are
recorded here.
6 Its balance can never 6 Its balance may be either debit or credit.
be credit.
7 Its balance is carried 7 Its balance is transferred to Capital Fund.
over to Receipts &
Payments Account of
the next year.
8 This account shows 8 It has no opening balance.
opening balance except
in the first year.
9 The closing balance of 9 Its. closing balance represents either surplus or
this account represent deficit. Credit balance indicates surplus, while
in the first year. debit balance indicates deficit.
10 This account records 10 Transactions relating to the current year only
transactions relating to are recorded in it. Hence, adjustments are
past, present and invariably made for pre-received or accrued
future, years. Hence, incomes and pre-paid or outstanding expenses.
no adjustment is made In a word, it is prepared on Accrual basis.
for pre-received or
accrued incomes and
pre-paid or outstanding
expenses. In a word, it
is prepared on cash
basis.
11 It is, in fact, an 11 It is, infect, similar to Profit & Loss ' Account of
abridged Cash Book. a profit-seeking business
 concern.
12 It is outside the 12 It is within the Double Entry system.
Double Entry system.
13 It is not 13 It is accompanied by Balance Sheet
accompanied by
Balance Sheet.
14 Its preparation is not 14 It is compulsory. It must be prepared in
compulsory. order to ascertain the true result of a
concern.

Prime Costs
The calculation for prime cost includes the total amount spent on direct materials in
addition to direct labor. Tangible components such as raw materials necessary to create
a finished product are included in direct materials. For instance, the engine of a car or
the spokes of a bicycle are included in direct material costs because they are each
necessary to complete production of that specific item. Direct labor costs include the
salary, wages or benefits paid to an employee who works on the completion of finished
products. Compensation paid to machinists, painters or welders is common in
calculating prime costs. Unlike conversion costs, prime costs do not include any indirect
costs.

Prime costs are reviewed by operations managers to ensure the company has an
efficient production process. The calculation of prime costs also helps organizations set
prices at a level that produce an acceptable amount of profit.

Conversion Costs
Conversion costs include direct labor and overhead expenses incurred due to the
transformation of raw materials into finished products. Overhead costs are defined as
the expenses that cannot be directly attributed to the production process but are
necessary for operations, such as electricity or other utilities required to keep a
manufacturing plant functioning throughout the day. Direct labor costs are the same as
those used in prime cost calculations.

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Comparison Chart
BASIS FOR
BILL OF EXCHANGE PROMISSORY NOTE
COMPARISON
Bill of Exchange is an instrument in A promissory note is a written promise made
Meaning writing showing the indebtedness of a by the debtor to pay a certain sum of money to
buyer towards the seller of goods. the creditor at a future specified date.
Section 5 of Negotiable Instrument
Defined in Section 4 of Negotiable Instrument Act, 1881.
Act, 1881.
Three parties, i.e. drawer, drawee and
Parties Two parties, i.e. drawer and payee.
payee.
Drawn by Creditor Debtor
Liability of Maker Secondary and conditional Secondary and conditional
Can maker and payee be
Yes No
the same person?
Copies Bill can be drawn in copies. Promissory Note cannot be drawn in copies.
Notice is necessary to be given to all Notice is not necessary to be given to the
Dishonor
the parties involved. maker.

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There are three types of assets

1. Fixed assets
Those assets which will be used by the company for a long period of time.
a) Tangible assets: those assets which we can see and touch and exp Land & Buildings, Plant
& Machinery,Furniture, fixtures and fittings
b) Intangible assets: Those assets which we can't see and touch like Goodwill, Patents,
Copyrights, Trade Mark etc
2. Current assets
Those assets which can be easily converted into cash within one year like cash in hand, cash
at bank, receivable, stock etc
3. Fictitious assets:
its not the actual assets , its the expenditure occurred at the tine of commencement of firm
( capital expenditure )like preliminary expenses, discount on issue on debenture/shares,
underwriting commission etc

Cost Accounting System

Cost accounting systems are part of an enterprise’s information system and refer to the
internal cost tracking and allocation systems to track costs and expenditures. A proper cost
accounting system assists management in the planning and control of the business
operations as well as in analyzing product profitability

A cost accounting system (also called product costing system or costing system) is a
framework used by firms to estimate the cost of their products for

profitability analysis,

inventory valuation and

cost control. (PA, IV, CC)

Estimating the accurate cost of products is critical for profitable operations. A firm must
know which products are profitable and which ones are not, and this can be ascertained
only when it has estimated the correct cost of the product. Further, a product costing
system helps in estimating the closing value of materials inventory, work-in-progress and
finished goods inventory for the purpose of financial statement preparation.

There are several other advantages of a well defined costing system in an organization like

1. Generating information for decision making,

2. Supplying information to the management for internal control,
3. Detailed analysis of costs, etc.

A good cost accounting system will :

•Enable cost of sales to be computed.
•Provide means for valuing inventories.
 •Aid in the control and management of a company.
•Measure the efficiency of men, materials and machines.
•Identify wastes so as to pave way for cost reduction.
•Make possible inter-firm comparison.
•Provide data for pricing and policy decisions.
•Form a basis for the preparation of various analytical reports.
Characteristics of an Ideal Costing System :
1. Suitability to the business-designed according to the nature, conditions, requirements and
size of the business.
2. Simplicity-simple to understand and operate.
3. Flexibility.
4. Economical.
5. Comparability with past figures of the organization, figures of other departments or figures
of other organizations in the industry.
6. Accurate and timely information.
7. Minimum changes in the existing organizational set up.
8. Proper classification and accounting for material, labor and overheads made at the time of
recording of the transaction itself.
Five parts of a cost accounting system :
1) An input measurement basis, IMB
2) An inventory valuation method, IVM
3) A cost accumulation method, CAM
4) A cost flow assumption, and CFA
5) A capability of recording inventory cost flows at certain intervals.

These five parts and the alternatives under each part are summarized below. Note that many
possible cost accounting systems can be designed from the various combinations of the
available alternatives, although not all of the alternatives are compatible. Selecting one part
from each category provides a basis for developing an operational definition of a specific cost
accounting system.

Append below are some of the essential features of a good costing

Accounting system:

Characteristics of an Ideal Costing System:

An ideal system of costing is that which achieves the objectives of a costing

system and brings all advantages of costing to the business. Following are the

main characteristics which an ideal system of costing should possess or the points

which should be taken into consideration before installing a costing system.

(i) Suitability to the Business:

A costing system should be tailor-made, practical and must be devised according

to the nature, conditions, requirements and size of the business. Any system

which serves the purposes of the business and supplies necessary information for

running the business efficiently is an ideal system.

(ii) Simplicity:
The system of costing should be simple and plain so that it may be easily

understood even by a person of average intelligence. The facts, figures and other

information’s provided by cost accounting must be presented in the right form at

the right time to the right person in order to make it more meaningful.
(iii) Flexibility:
The system of costing must be flexible so that it may be changed according to

changed conditions and circumstances. The system without such flexibility will be

outmoded because of fast changes in business and industry. Thus, the system

must have the capacity of expansion or contraction without much change.

(iv) Economical:
A costing system is like other economic goods. It costs money just like economic

goods. If the system is too expensive, management may be unwilling to pay as

buyers are not willing to pay for the goods if these are expensive as compared to

their utility. A costing system should not be expensive and must be adapted

according to the financial capacity of the business.

The benefits to be derived from the system must be more than its costs as

management will be willing to install the system when it’s perceived expected

benefits exceed its perceived expected costs. In short, the system must be

economical taking into consideration the requirements of the business. The cost

of installing and operating the system should justify the results.

(v) Comparability:
The costing system must be such so that it may provide facts and figures

necessary to management for evaluating the performance by comparing it with

the past figures, or figures of other concerns or against the industry as a whole or

other department of the same concern.

(vi) Capability of Presenting Information at the Desired Time:
The system must provide accurate and timely information so that it may be

helpful to management for taking decisions and suitable action for the purpose of

cost control.

Types of Cost Accounting

Standard Cost Accounting

This type of cost accounting uses ratios to compare efficient uses of labor and materials
to produce goods or services under standard conditions.

Activity Based Costing

Activity based costing accumulates the overheads from each department and assigns
them to specific cost objects like services, customers, or products.

Lean Accounting

Marginal Costing
Considered a simplified model of cost accounting, marginal costing (sometimes
called cost-volume-profit analysis) is an analysis of the relationship between a product
or service's sales price, the volume of sales, the amount produced, expenses, costs
and profits. That specific relationship is called the contribution margin. The contribution
margin is calculated by dividing revenue minus variable cost by revenue. This type of
analysis can be used by management to gain insight on potential profits as impacted
by changing costs, what types of sales prices to establish, and types of marketing
campaigns.

What is 'Overhead'
Overhead is an accounting term that refers to all ongoing business expenses not
 including or related to direct labor, direct materials or third-party expenses that are
billed directly to customers. A company must pay overhead on an ongoing basis,
regardless of whether the company is doing a high or low volume of business. It is
important not just for budgeting purposes but for determining how much a company
must charge for its products or services to make a profit. For example, a service-based
business that operates in a traditional white-collar office setting has overhead expenses
such as rent, utilities and insurance.

Approaches to Cost Accounting

Different cost accounting techniques are used in different industries to analyze and present costs for the
purposes of control and managerial decisions. The generally-used types of costing are as follows:

• Marginal costing: Marginal costing entails the allocation of only variable costs, i.e. direct materials, direct
labour and other direct expenses, and variable overheads to the production. It does not take into account
the fixed cost of production. This type of costing emphasizes the distinction between fixed and variable
costs.

• Absorption costing: In absorption costing, the full costs (that is, both fixed and variable costs) are absorbed
into production.

• Standard costing: In standard costing, a cost is predicted in advance of production, based on

predetermined standards under a given set of operating conditions. Standard costs are compared with
actual costs periodically, and revised to avoid losses due to outdated costing.

• Historical costing: Historical costing, unlike standard costing, uses actual costs, determined after they have
been incurred. Almost all organizations use the historical costing system of accounting for costs.

Different Methods of Costing

Here's a breakdown of each different method of costing:

• Unit costing: This method is also known as "single output costing." This method of costing is used for products that
can be expressed in identical quantitative units. Unit costing is suitable for products that are manufactured by
continuous manufacturing activity: for example, brick making, mining, cement manufacturing, dairy operations, or
flour mills. Costs are ascertained for convenient units of output.
• Job costing: Under this method, costs are ascertained for each work order separately as each job has its own
specifications and scope. Job costing is used, for example, in painting, car repair, decoration, and building repair.

• Contract costing: Contract costing is performed for big jobs involving heavy expenditure, long periods of time, and
often different work sites. Each contract is treated as a separate unit for costing. This is also known as terminal
costing. Projects requiring contract costing include construction of bridges, roads, and buildings.

• Batch costing: This method of costing is used where units produced in a batch are uniform in nature and design.
For the purpose of costing, each batch is treated as an individual job or separate unit. Industries like bakeries and
pharmaceuticals usually use the batch costing method.

• Operating costing or service costing: Operating or service costing is used to ascertain the cost of particular
service-oriented units, such as nursing homes, busses, or railways. Each particular service is treated as a separate
unit in operating costing. In the case of a nursing home, a unit is treated as the cost of a bed per day, while, for
busses, operating cost for a kilometer is treated as a unit.

• Process costing: This kind of costing is used for products that go through different processes. For example, the
manufacturing of clothes involves several processes. The first process is spinning. The output of that spinning
process, yarn, is a finished product which can either be sold on the market to weavers, or used as a raw material
for a weaving process in the same manufacturing unit. To find out the cost of the yarn, one needs to determine the
cost of the spinning process. In the second step, the output of the weaving process, cloth, can also can be sold as
a finished product in the market. In this case, the cost of cloth needs to be evaluated. The third process is
converting the cloth to a finished product, for example a shirt or pair of trousers. Each process that can result in
either a finished good or a raw material for the next process must be evaluated separately. In such multi-process
industries, process costing is used to ascertain the cost at each stage of production.

• Multiple costing or composite costing: When the output is comprised of many assembled parts or components,
as with television, motor cars, or electronics gadgets, costs have to be ascertained for each component, as well as
with the finished product. Such costing may involve different methods of costing for different components.
Therefore, this type of costing is known as composite costing or multiple costing.

• Uniform costing: This is not a separate method of costing, but rather a system in which a number of firms in the
same industry use the same method of costing, using agreed-on principles and standard accounting practices. This
helps in setting the price of the product and in inter-firm comparisons..

METHODS OF CA -- Two Types of Cost Accounting Systems

There are two types of traditional costing systems used by companies in determining product costs.

They are job order costing and process costing.

Job order costing is a method of assigning costs to a specific unit or product. An example would be

an auto repair shop rebuilding an engine. Each engine is an individual item and the car it came out of

is individual. What's wrong with this engine? Probably not the same thing that was wrong with the last
engine. For this reason, the cost that the auto repair shop charges is time plus material. It will be

different for each engine it rebuilds.

Process costing is a method of assigning costs to mass quantities of a product or service. Consider

the same auto repair shop, but now let's look at the oil changes it offers. The cars and customers may

be different, but the oil change is the same every time. First the oil and old filter come out, and then

the new ones go in.

1. Job Costing:

Under this method, costs are collected and accumulated for each job, work order or

project separately. Each job can be separately identified; so it becomes essential to

analyse the cost according to each job. A job card is prepared for each job for cost

accumulation. This method is applicable to printers, machine tool manufacturers,

foundries and general engineering workshops.

2. Contract Costing:

When the job is big and spread over long periods of time, the method of contract costing

is used. A separate account is kept for each individual contract. This method is used by

builders, civil engineering contractors, constructional and mechanical engineering firms

etc.

3. Batch Costing:

This is an extension of job costing. A batch may represent a number of small orders

passed through the factory in batch. Each hatch is treated as a unit of cost and

separately costed. The cost per unit is determined by dividing the cost of the batch by

the number of units produced in a batch. This method is mainly applied in biscuits

manufacture, garments manufacture and spare parts and components manufacture.

4. Process Costing:

This is suitable for industries where production is continuous, manufacturing is carried on

by distinct and well defined processes, the finished products of one process becomes the

raw material of the subsequent process, different products with or without byproducts are
produced simultaneously at the same process and products produced during a particular

process are exactly identical.

As finished products are obtained at the end of each process, it will be necessary to

ascertain not only the cost of each process but also cost per unit at each process. A

separate account is opened for each process to which all expenditure incurred thereon is

charged.

The cost per unit is obtained by averaging the expenditure incurred on the process during

a certain period. Hence, this is known as average costing. As the products are

manufactured in a continuous process, this is also known as continuous costing. Process

costing is generally followed in Textile Industries, Chemical Industries, Tanneries, Paper

Manufacture etc.

5. One Operation (Unit or Output) Costing:

This is suitable for industries where manufacture is continuous and units are identical.

This method is applied in industries like mines, quarries, oil drilling, breweries, cement

works, brick works etc. In all these industries there is natural or standard unit of cost. For

example, a barrel of beer in breweries, a tonne of coal in collieries, one thousand of bricks

in brickworks etc.
Difference b/w capital and revenue expenditure

Comparison Chart
BASIS FOR
CAPITAL EXPENDITURE REVENUE EXPENDITURE
COMPARISON
The expenditure incurred in acquiring a capital Expenses incurred in regulating
Meaning asset or improving the capacity of an existing day to day activities of the
one, resulting in the extension in its life years. business.
Term Long Term Short Term
Capitalization Yes No
Shown in Income Statement & Balance Sheet Income Statement
Outlay Non-recurring Recurring
Benefit More than one year Only in current accounting year
Earning capacity Seeks to improve earning capacity Maintain earning capacity
Matching concept Not matched with capital receipts Matched with revenue receipts

Definition of Capital Expenditure

The amount spent by the company for possessing any long-term capital asset or to
enhance the working capacity of any existing capital asset, or to increase its lifespan to
generate future cash flows or to decrease the cost of production, is known as Capital
expenditure. As a huge amount is spent on it, the expenditure is capitalised, i.e. the
amount of expenditure is spread over the remaining useful life of the asset.
In a nutshell, the expenditure which is done for initiate current, as well as the future
economic benefit, is capital expenditure. It is a long-term investment done by the entity,
in the name of assets, to create financial gain for the years to come. For example –
Purchase of Machinery or installation of equipment to the machinery which will improve
its productivity capacity or life years.

Definition of Revenue Expenditure

The expenditure which is incurred on a regular basis for conducting the operational
activities of the business are known as Revenue expenditure like the purchase of stock,
carriage, freight, etc.. As per the accrual accounting assumption, the recognition of
revenues is done when they are earned while expenditure is recognised when they are
incurred. Therefore, the revenue expenditure is charged to the Income Statement as and
when they occur. This satisfies the fundamental principle of Accounting i.e. Matching
Principle in which the expenses are recorded in the period of their incurrence.
The benefit generated by the revenue expenditure is for the current accounting year. The
examples of revenue expenditure are as under – Wages & Salary, Printing & Stationery,
Electricity Expenses, Repairs and Maintenance Expenses, Inventory, Postage,
Insurance, taxes, etc.

Key Differences Between Capital and Revenue Expenditure

1.Capital expenditure generates future economic benefits, but the Revenue

expenditure generates benefit for the current year only.

2.The major difference between the two is that the Capital expenditure is a one-

time investment of money. On the contrary, revenue expenditure occurs

frequently.

3.Capital expenditure is shown in the Balance Sheet, in asset side, and in the

Income Statement (depreciation), but Revenue Expenditure is shown only in the

Income Statement.

4.Capital Expenditure is capitalised as opposed to Revenue Expenditure, which is

not capitalised.

5.Capital Expenditure is a long term expenditure. Conversely, Revenue

Expenditure is a short term expenditure.

6.Capital Expenditure attempts to improve the earning capacity of the entity. On

the contrary, revenue expenditure aims at maintaining the earning capacity of the

company.
7.Capital expenditure is not matched with the capital receipts. Unlike revenue

expenditure, which is matched with the revenue receipts.

Example

If a company deals in computers and opens a new branch at a different location for
which it acquires a building. The acquisition of the building will be a capital expenditure
while the purchase of computers will be a revenue expenditure. Let’s look it another way,
If a company is involved in property dealing business the purchase of the buildings
will be a revenue expenditure while the purchase of machinery would be a capital
expenditure.
Note: Here you must focus on the intention of expenditure.

Conclusion

Capital Expenditure and Revenue Expenditure both are important for business for
earning a profit in the present as well as in subsequent years. Both have its own merits
and demerits. In the case of a capital expenditure an asset has been purchased by the
company which generates revenue for upcoming years. On the other hand, no asset is
acquired as such in the case of a Revenue Expenditure.

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