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## Chapter 3: Capital, Revenue and Deferred Revenue Expenditure & Receipts ### 3.1 Introduction The distinction between "Capital" and "Revenue" is of vital importance to accounting. It directly affects the correctness of the amount of profit made by the firm during a given period. It also affects...

## Chapter 3: Capital, Revenue and Deferred Revenue Expenditure & Receipts ### 3.1 Introduction The distinction between "Capital" and "Revenue" is of vital importance to accounting. It directly affects the correctness of the amount of profit made by the firm during a given period. It also affects the financial position of the firm on any given date. The distinction between Capital and Revenue requires matching revenues with expenses incurred for a period, with revenue matching expenses. This concept involves two steps: 1. Ascertain the revenue earned for a given accounting period and expenses incurred to earn that revenue 2. Determine between Capital and Revenue The distinction between Capital and Revenue is relevant for both receipts and expenditures. For example, sale proceeds of obsolete plant and machinery, or capital received from the partner are not income for a given period. These receipts are credited to profit and loss account. They are capital receipts. Similarly, there are certain payments which do not represent expense for the year, e.g., purchase of land and building or repayment of loan taken from the bank. Hence such payments are not to be debited to profit and loss account. They are capital expenditures. The distinction between capital and revenue becomes relevant in the preparation of final accounts viz. profit and loss account and balance sheet. All items appearing in the trial balance are taken either to trading and profit and loss account or to the balance sheet. All revenue expenditures and receipts are taken to the trading and profit and loss account, while all capital expenditures and receipts are taken to the balance sheet. Each item of expenditure and receipt must therefore, be placed in the appropriate financial statement. The distinction can be depicted with the help of a chart. ### 3.2 Capital Expenditure ### 3.2.1 What is Capital Expenditure  Capital expenditure is an expenditure which is incurred to acquire an asset which is either not a tangible asset or its benefit is likely to last for more than one accounting period. It is generally incurred with a view to improve future profitability. It is **not** absolutely essential for something to come into existence as a result of capital expenditure. For example, if a building is renovated to provide additional space, which can be used to expand the business, such renovation is a capital expenditure because it increases the capacity of the business. Following are examples of capital expenditures: 1. Expenditures incurred to purchase or acquire buildings, plant and machinery, patents, copyrights, trademarks, etc. 2. Expenditures incurred on major repairs or installation of an asset.