Competitive Exams Accountancy: Revenue and capital
Difference between revenue and capital items
If any item of business which does not create any asset of business that type of items are called revenue items, suppose we pay rent but rent can not create any fixed asset so this is revenue item and it must show in profit and loss account, but if we have a special fund for building, this fund create long term asset up to that period this will show as fixed liabilities. This is not revenue item. There is also major difference is that revenue items benefit is related to current year but capital items'benefits are related more than one year.
If advertisement's expense is 100 Rupees and its benefit can only related to current year then this is revenue item. But if we expand Rs. 9000000 lakh on advertisement and its estimated benefit is for 10 years then this will be the capital item.
All revenue item will show in profit and loss account and all capital items will shown in balance sheet or financial statement.
- Capital loss: Capital loss may be defined as the loss relating to sale of any fixed asset or any other financial loss like premium given on repayment of debentures or bonds, or discount on issue of shares and debentures. Capital loss may explain with many other examples
- Ist Example: Suppose, if any machine's book value is $50000 and sell it on $40000 and $10000 is loss on sale of machinery, this is called capital loss.
- 2nd Example: Suppose, if a company has 100 debentures of other company and each debenture is of $100 but these debentures are sold at $80 per debenture, so company is getting loss on sale of debenture of $2000. This is capital loss.
- In profit and loss account of company, we can not show any capital loss. In other words these losses can not be debited in Profit and loss account of company. These all losses will show in assets side of balance sheet of company. After this, it is written off by dividing number of fixed years and transferring to profit and loss account. If you know what is mean of written off, then, I can also explain it, written off means that part of any expenses or loss which is transferred from balance sheet to profit and loss account for closing the account of loss or expenses, specially capital losses.
- Revenue losses: Revenue losses include all losses which happen due to operating any business activity. It includes cash discount on sale, depreciation, loss due to falling of market prices. So, these losses will show in the debit side of profit and loss account of company. It is deemed that when we start the different activities of our business, many losses are happen, so it should be closed by transferring all these losses to profit and loss account.
Feature of revenue expenditures
There are following main features or characteristics of revenue expenditures. These features are very useful for your decision to adding any expenses in profit and loss account.
General operating expenses Any expenses which is related general operation of business that all expenses will be revenue expenditures and will be debited in profit and loss account
Expenses related to short period These type of expenses are related to short period, means benefit of these expenses is less than one year.
Expenses for maintaining the stability of fixed assets These expenses'main feature is that these expenses is useful for maintaining the stability or efficiency of fixed assets
Recurring Nature One of most important feature of these expenses that these expenses are recurring nature. In other words these expenses happen Again and again in general business activities. For example, expenses for giving refreshment is revenue expenditure because almost daily, these type of expenses is paid by company.
Helpful for maintaining the profit of business
These type of expenditure is useful for maintaining the profit of business, but also above features should include in the expenses which I have mentioned in above points because capital expenditure will also helpful for maintaining the profit and you will then confused revenue and capital expenditure's difference.