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.
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 Furniture of $12,000 was sold for $20,000 and there was a profit of (b) $8000, Capital Profit. $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 A motor car of the book value of $80,000 is sold for $60,000 and so (b) Capital loss $20,000 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 Amount received on sale of a portion of plant and machinery is treated (b) Capital Expenditure $ 2,40,000. 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 $1,000, the difference between the book value of fixture and fitting (b) Capital Profit $1,000 discarded and the amount received on sale of them will be treated as (c) Capital Expenditure $ 12,000 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. |