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Capital and Revenue Payments:

It may be noted that there is a difference between an expenditure and payment. Expenditure is the full amount spent by a business whether paid or yet to be paid while payment means the amount actually paid. For example, a machinery is purchased for $50,000 from Saleem & Co., $30,000 were paid to them in cash, agreeing to pay $20,000 after one month. In this case, total amount spent is $50,000 but the payment is $30,000 only.

Capital Payments:

This is an amount which is actually paid on account of a capital expenditure.

Revenue Payments:

This is an amount which is actually paid on account of some revenue expenditure. For example, we purchase goods of $30,000, this is a revenue expenditure of $30,000. We paid cash to the supplier only $20,000, this is a revenue payment. If the whole amount is paid in cash, then both the revenue expenditure as well as revenue payment will be $30,000.

Example:

Do you consider the following to be capital or revenue items? Give reasons.

  1. Amount contributed by the proprietor as his capital.
  2. Amount realized from sale of old furniture.
  3. Money borrowed from a bank to acquire fixed assets.
  4. Amount received from a debtor whose account was previously written off as bad.
  5. $20,000 received from sale of old machinery which had cost $12,000.
  6. A motor car, whose book value is $8,000 was sold for $60,000.
  7. Received $2,00,000 from the sale of shares of a company.
  8. Expenses on issue of shares amounted to $2,500.
  9. Plant and Machinery which stood in books at $7,50,000, included a machine at book value of $1,50,000. This being obsolete was sold off for $50,000 and was replaced by a new machine which costs $2,40,000.
  10. The fixtures and fittings appeared in the books at $75,000. Of these some portion of the book value of $15,000 was discarded and sold off for $16,000 and new i furniture was acquired for $12,000.

Solution:

No. Nature of Items Reasons
1. Capital Receipt.  Amount contributed by the proprietor in his business is a capital receipt because the benefit of this receipt will be enjoyed for a long-period of time by the business
2. Capital Receipt. When furniture was purchased it was a capital expenditure. therefore, the sale of furniture will be a capital receipt now.
3. Capital Receipt. Money is borrowed to acquire fixed assets, that will benefit the business for many years, so it is a capital receipt.
4. Revenue Receipt. When debtor's account was previously written off, it was treated as a revenue loss (expenditure), now, amount received from him will be treated as a revenue receipt.
5. (a) $20,000, Capital Receipt

(b) $8000, Capital Profit.

Furniture of $12,000 was sold for $20,000 and there was a profit of $8,000. Therefore, $20,000 is a Capital Receipt and the profit of $8,000 is regarded as Capital Profit.
6. (a) Capital Receipt $60,000

(b) Capital loss $20,000

A motor car of the book value of $80,000 is sold for $60,000 and so there is a loss of $20,000. The full amount received $60,000 is a capital receipt and loss of $20,000 is a capital loss, because this is not a loss which occurred in the ordinary course of the business.
7. Capital Receipt Amount received from sale of share is a capital receipt because it will benefit for a long-period of time.
8. Capital Expenditure. Amount spent on issue of shares is a capital expenditure because it is incurred to raise the capital of the business.
9. (a) Capital Receipt $50,000

(b) Capital Expenditure $ 2,40,000.

Amount received on sale of a portion of plant and machinery is treated as capital receipt ($50,000) and $1,00,000, the difference between the book value of the machine sold an the amount realized on sale will have to be charged off t revenue as depreciation. $2,40,000, the cost of new machinery is treated as a capital expenditure.
10. (a) Capital Receipt $16000
(b) Capital Profit $1,000
(c) Capital Expenditure $ 12,000
$1,000, the difference between the book value of fixture and fitting discarded and the amount received on sale of them will be treated as capital profit and $12,000, the cost of new fixture etc. is a capital expenditure. The total value realized $16,000 from sale is treated as a capital receipt.

Relevant Articles:

Capital Expenditures

Revenue Expenditures
Difference between Capital Expenditure and Revenue Expenditure
When Revenue Expenditures are not regarded as Revenue Expenditures?
Principles for making distinction between Capital and Revenue Expenditure
Capital and Revenue Receipts
Capital and Revenue Profits and Losses
Capital and Revenue Payments

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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