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Classification of income
Capital income Revenue income
Capital income is an income which does not relate to operations of the business or which does not grow out
of or pertain to the running of the business proper. Examples: Share premium, sale of a fixed asset for a value more than that for which it was purchased.eg. Capital gain of Rs 150,000 arises when building bought for Rs. 200,000 is sold for Rs. 350,000.
Note: Only the profit realised over and above the cost of the fixed asset should be taken as capital profit (transferred to capital reserve) while the profit realised over and above book value of the asset till it does not exceed the original cost fo the asset should be taken as revenue profit (credited to Profit and Loss Account)
Expenditure
Expenditure refers to a payment or spending or a promise to make future payment for benefits received i.e. for assets or services.
Classification of Expenditure
Capital Expenditure Revenue Expenditure Deferred Revenue Expenditure
Capital Expenditure
Capital Expenditure is any expenditure which is incurred for the purpose of long term advantage.
Such expenditure is either incurred for acquisition of a fixed asset (tangible or intangible) or on permanent improvement or addition or substitution or extension to an asset to increase the earning capacity of the business enterprise
The amount spent on existing asset for the purpose of its improvement or extension
which will raise the output or reduce the cost of production
Revenue Expenditure
These are expenses whose benefit expires within the year of expenditure and which are incurred to maintain the earning capacity of existing assets.
Revenue Expenditure
Revenue items generally include: The cost of materials used in manufacturing goods intended for resale. Wages paid in connection with the production of goods meant for sale.
2. Expenditure is deemed to be capital when it is made for the initiation of a business, for extension of a business or for a substantial replacement of equipment. 3. Expenditure is capital when it is made not only once and for all but with a view to bringing into existence an asset or an advantage for the enduring benefit. 4. Whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital
It is consumed within an accounting year i.e. benefits only one year. Thus entire amount is charged to income statement.Does not appear in the balance sheet. Shown in Trading and profit & loss A/c
Distinction between Capital Expenditure and Deferred Revenue Expenditure 1. Nature of expenditure-deferred revenue expenditure is a revenue in nature but is spread over a number of years because it is incurred for a period more than one accounting year. 2. Years of benefit: The deferred revenue expenditure benefits lesser number of years in comparison to capital expenditure.
Deferred revenue expenditure-for 3-5 years Capital expenditure-for 10-15 years
3. Recovery: Deferred revenue expenditure once incurred cannot be recovered back generally. While capital expenditure is capable of being reconverted into cash though at a loss.