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.
- Amount
contributed by the proprietor as his capital.
- Amount
realized from sale of old furniture.
- Money borrowed
from a bank to acquire fixed assets.
- Amount
received from a debtor whose account was
previously written off as bad.
- $20,000
received from sale of old machinery which had
cost $12,000.
- A motor car,
whose book value is $8,000 was sold for $60,000.
- Received
$2,00,000 from the sale of shares of a company.
- Expenses on
issue of shares amounted to $2,500.
- 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.
- 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. |
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