Capital and Revenue Class 11 Notes

Capital and Revenue is one of the shortest chapter in Accountancy. Here are the Capital and Revenue class 11 notes.

Capital Expenditure

Any expenditure which is incurred in acquiring or increasing the value of a fixed asset is termed capital expenditure.

As such, the amount spent on the purchase of land and building, plant & machinery, furniture, etc. is capital expenditure.

Such expenditure yields benefits over a long period and hence is written in assets. Following are the examples of capital expenditure:

• Expenditure which results in the acquisition of a fixed asset such as land, building, plant, motor vehicles, trademarks, etc.
• Expenditure in connection with the purchase or erection of a fixed asset such as wages paid to workers for erecting machines, cartage paid on acquiring plant and machinery, over-hauling of second-hand machines, etc.
• All amount spent up to the point on the asset is put to use is treated as capital expenditure.
• Expenditure incurred for establishing the business, e.g., the cost of a patent, preliminary expenses, goodwill, etc.
• Interest on capital up to the point production is ready to commence or during the period of formation of the company.
• Expenditure incurred on the purchase of second-hand asset and on putting such asset into working condition.

Revenue Expenditure

Any expenditure, the benefit of which is received during the current year itself is termed as revenue expenditure. As such, all the revenue expenditures are debited to Trading and Profit & Loss Account.

Such expenditure does not result in an increase in the earning capacity of the business but only helps in maintaining the existing earning capacity.

Following are the examples of Revenue Expenditure:

• Expenses incurred for the purpose of day to day running of business such as manufacturing expenses, office expenses, selling expenses, etc.
• Expenses incurred on the ordinary repairs and maintenance of fixed assets, white-washing of building, etc.
• Payment for goods purchased for resale.
• Depreciation on fixed assets.
• Purchase of raw materials for converting it into finished goods.
• Interest on loan and interest on capital for the period after the asset is put to use.
• Replacement of worn-out part of an existing machine.
• Loss from sale of fixed assets.

Difference between Capital Expenditure and Revenue Expenditure

Source Documents Class 11 Notes

Capital Receipts & Revenue Receipts

It is also necessary to make a proper distinction between capital receipts and revenue receipts because the revenue receipts are shown on the credit side of trading and profit & loss Account whereas the capital receipts are shown in the balance sheet either as increase in liabilities or as reduction in the value of the assets.

Capital Receipts

Examples of capital receipts are:

• Amount received from the sale of fixed assets or investments.
• Capital contributed by proprietors, partners or money obtained from issue of shares and debentures in case of company.
• Amount received by way of loans.

Revenue Receipts

It refers to those receipts which arise in the normal course of business. They are recurring in nature, such as:

• Money obtained from sale of goods.
• Commission and fees received for services rendered.
• Interest and dividend received on investments.

Deferred Revenue Expenditure

There are certain expenditures which are revenue in nature but the benefit of which is likely to be derived over a number of years. Such expenditures are called as ‘Deferred Revenue Expenditures’.