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(i) Free supply of stationery to the students by the government ... Classify the following items into capital and revenue: 1. Advertising Expense is a(n) ; it stockholders' equity. Expenditure means spending on something. Loss on sale of old furniture. (b) The cost of replacement valves on all the labelling machines in a canning factory. Revenue items are those items having short term effects on business, (normally less than one year). Classify each of the following items according to (1) whether it belongs on the income statement (IS) or balance sheet (BS) and (2) whether it is a revenue (R), expense (E), asset (A), liability (L), or stockholders' equity (SE) item Capital Stock (iv) Octroi duty paid on machinery. The following are the types of capital and revenue items in accounting: Capital Receipts is the amount received in the form of additional Capital (by issuing shares) loans or by the sale proceeds of any fixed assets. Ram (Customer) viii. There are two main types of of capital items; (i) capital expenditure and (ii) capital receipt. State with reasons whether the fallowing items of expenditure are capital or revenue. Capital expenditure = Shown as a non-current asset in the balance sheet. Fees earned but not yet received. Capital Loss is not shown in the Profit and Loss Account. Classify the following accounts into assets, liabilities, equity, expenses or income. (E) Capital Losses: Capital losses occur when selling fixed assets or raising share capital. The accounting transactions may be divided into two categories: (1) Capital transactions (relating to capital items), (2) Revenue transactions (relating to revenue items). Another example, suppose a company issues its shares of the face value of Rs 100 for Rs 110 each, i.e. Revenue receipt = Shown as income in income statement. (g) Capital Expenditure = Legal expenses incurred in purchasing landed property are capital expenditures, as part of the cost of a non-current asset purchased. Salaries paid to staff 4. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. Machinery ii. Disclaimer 9. Subscriptions received in advance by a magazine publisher. Which of the following expenditures are capital or revenue, give your reasons? There are two main types of revenue items; (i) revenue expenditure and … Distinguish between capital and revenue expenditures: Classify the following items as either a capital expenditure or a revenue expenditure (an expense) a. This is often referred to as trade payables. Capital profits are earned as a result of selling some fixed assets or in connection with raising capital for the firm. mortgages, vehicle loans) 3. b. Salary owed but not yet paid. Classify the following items as either revenue or capital expenditure: (a) An extension to an office building costing £24,000. (d) Payment made to purchase an existing business. Accounting Financial Accounting Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense: a. The following transactions are taken from the books of H. Hanson for the first week of January 2019: (a) Cost of the air-conditioning the office of director. I think it is better to go through this MCQ’s. For example, profit from sale of goods, income from investments, discount received, Interest Earned etc. Rs 50,000 are a profit of capital nature. There are two main types of of capital items; (i) capital expenditure and (ii) capital receipt. To a large extent, accounting attempts to resolve these issues by relying upon the statement preparer's subjective judgements. Revenue Receipts are the amount received in the ordinary course of a business. (Delhi 2010) (i) Wealth tax (ii) Value added tax Revenue losses arise during the normal course of business. For example, fixed assets; tangible or intangible assets; (land, building, machinery, legal rights, etc) are capital items. capital expenditure and revenue expenditure. Following is the list of various accounts. (b) Cost of pulling down an old building in order to replace it by a new one. A two-year premium paid on insurance policy. One obvious case in point is the distinction between the ordinary revenue and capital gain nature of transactions; another is the inter-period allocation of expenditure. 2. (b) Capital Expenditure = The wages paid to workmen employed for extension of building is a capital expenditure, because wages have been incurred in extension of a non-current asset. (d) Capital Expenditure = Purchase of business means purchase of its assets and liabilities; therefore, it is a capital expenditure. 2. 2. (a) Capital Expenditure = The benefit of this expenditure will be available for a number of years; therefore, it is capital expenditure. Interest Received x. Mohan (Proprietor) Solution: Question 6. Capital receipt and revenue receipt, both are the very important components of accounting. It is the incomes earned from selling merchandise, or in the form of discount, commission, interest, transfer fees etc. This is a current liability account that shows the amount a company owes for items or services purchased on credit. If capital losses are huge, it is common to spread them over a number of years and a proportionate amount is charged to Profit and Loss Account every year. (d) The freight, carriage and the installation charges cost on new machine amounting to $400. Is it true that the higher the depreciation, the lower the net income? Shares of the face value of Rs 100 issued at Rs 95, i.e. So, it is important to classify the Capital and Revenue Items. 4. Capital and revenue items. Home - (e) Revenue Expenditure = The expenditure is related to purchase of goods for resale, which itself is a revenue expense, therefore, carriage is also a revenue expense. It is the process of causing a liability by a commodity. Classify the following items into capital and Revenue . (iii) Transportation paid on machinery purchased. Cash received for services not yet rendered b. The proper allocation of capital items and revenue items are important for the fundamental principles of correct accounting. Why do accountants have to classify items as capital or revenue expenditures? Capital losses occur when selling fixed assets or raising share capital. Reply. (c) Expenditure incurred on renewal of patent’s right. (c) Expenditure on the construction of computer lab in school by the government. Assets: tangible and intangible items that the company owns that have value (e.g. Such losses are debited in the Profit and Loss Account. Question: Classify Each Of The Following Items As Belonging In The Revenue, Expenditure, Human Resources/payroll, Production, Or Financing Cycle. They are shown in the asset side of Balance Sheet. For example a land purchased by a business for Rs 2, 00,000 is sold for Rs. (c) Repairs to the warehouse roof. Giving reasons, classify the following into direct and indirect tax. Purchases v. Unsold Stock vi. Capital Expenditure is an expense made to acquire an asset or improve the capacity of the asset. (d) Capital Expenditure = Amount expended on freight and carriage and installation charges of the new machine into working condition. Bank Overdraft vii. (c) The cost of removing plant and machinery to new site. Capital items are those items which have long term effects on business, (normally more than one year). Plagiarism Prevention 4. It is not easy to give a correct rule to allocate capital items and revenue items. But the range is wider than that. Capital Receipts are shown in Balance Sheet. If the loss is manageable, they are debited to Profit and Loss Account of the same year. a. X-Ray plant purchased by a hospital. Purchase raw materials b. For example, repairs, wages, salaries, fuel, etc., are revenue items. Definition Revenue Items: Revenue items are those items having short term effects on business, (normally less than one year). Capital and Revenue Items Capital Items: The items which have long term effects on business - generally more than a year. (All India 2011) Ans.Difference between revenue receipts and capital receipts. 2, 50,000. Classify the following items as (a) accrued revenue, (b) accrued expense, (c) unearned revenue, or (d) prepaid expense: 1. Interest received. e. Donation received for constructing a swimming Pool. Give two examples of each. All of the following are examples of revenue expenditures: Routine repair/update costs on equipment. Capital Reserve ap­pears in the Balance Sheet as a liability. For instance, sale of goods, loss may incur. Rent Revenue is ; it stockholders' equity. Content Guidelines 2. Find out which are Assets, Liabilities, Capital, Revenue or Expense Accounts: i. (D) Revenue Profits: Revenue Profits are earned in the ordinary course of business. Module 2: Capital & Revenue Expenditure Classify the following expenditure/income into capital and revenue with reasons: 1. Cost of goods sold. Classify the following items as capital or revenue expenditure : (i) An extension of railway tracks in the factory area; (ii) Wages paid to machine operators; (iii) Installation costs of new production machine; (iv) Materials for extensions to foremen’s offices in the factory; (v) Rent paid for the factory; (vi) Payment for computer time to operate a new stores control system; (vii) Wages paid to own employees for building … Classify each of the following items as owner's drawings, revenue, or expense: a) advertising expense b) service revenue c) insurance expense d) salaries and wages expense e) owner's drawings f) rent revenue g) utilities expense Answer the following questions in depth .... 1. Report a Violation, Treatment of Some Typical Items in Fund Flow Statement: 9 Items, Accounting Treatment of Special Items (11 Items), Consignment Transaction at Cost Price Method (Accounting Entries). (f) Revenue Expenditure = Legal costs incurred on debt collection is a revenue expenditure; being incurred to avoid a revenue expense of bad debts. Before publishing your articles on this site, please read the following pages: 1. is also a revenue receipt. Classify the following items as either revenue or capital expenditure: a) An extension to an office building costing £24,000. Dividends is ; it stockholders' equity. We'll define them briefly and then look at each one in detail: 1. Privacy Policy 8. Rs 10 is capital profit. (b) Wages paid to business’ workers for extension of its building. Examples of revenue and capital expenditures. Reply. Interest: STUDY. Learn. Such profits are (a) transferred to Capital Account or (b) transferred to Capital Reserve Account. Capital Expenditure Capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset. Revenue Re­ceipts are shown in the Profit and Loss Account. These are braodly classified into two categories, i.e. Nice. (i) Wages paid on the purchase of goods. Capital expenditures are major investments of capital to expand a company's business. Question 4. Classification of these transactions reflects in the final statements of the company. Prohibited Content 3. The five account types are: Assets, Liabilities, Equity, Revenue (or Income) and Expenses. Sales iv. (g) Legal expenses incurred in purchasing a landed property. are solved by group of students and teacher of Commerce, which is also the largest student community of Commerce. Receipts and invoices keep the records of expenditures. According to modern approach, the accounts are classified as asset accounts, liability accounts, capital or owner’s equity accounts, withdrawal accounts, revenue/income accounts and expense accounts. (b) Capital Expenditure = This is a capital expenditure as it is a part of the total cost of the building. The main sources of non-tax revenue are: 1. A building purchased for Rs 2, 00,000 is sold for Rs 1, 50,000. Contact us - About us - Privacy policy, Effects of Incorrect Treatment of Capital and Revenue Items, Capital Expenditure and Revenue Expenditure, Double Entry for Expenses and Incomes (Revenues), Absorption Costing Approach or Total Costing, Accounting for Assets, Liabilities and Capital, Bad Debts and Provision for Doubtful Debts, Books of Original Entry and Division of Ledger. Classify the following items into revenue expenditure and capital expenditure. This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. c. Sale of old sports materials. Cash ix. 50,000 spent for railway siding. 3. It is also defined as items that are considered as long-give assets of a firm or items that occupy the assets section in a balance sheet called Capital Items. Copyright 10. Non-Tax Revenue: Non-Tax revenue refers to receipts of the government from all sources other than those of tax receipts. Revenue Profits are earned in the ordinary course of business. Why do you treat exchanges of similar and dissimilar assets differently? For “Classify the following as direct and indirect taxes”, refer HOTS. (a) Cost of overhauling and painting a recently bought old van. An expense is a word very similar to expenditure but expense shows the deduction in the value of the asset while expenditure simply denotes the obtaining of as… In order to know the fair performance and financial standing of a business; the nature of business transactions taking place during the year has to be analyzed. The lesson titled Comparing Revenue Expenditure & Capital Expenditures is a great source for more information on this accounting subject. So far, we’ve spoken mainly about physical revenue expenditures. 5. IAS 1 sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. A. (c) Capital Expenditure = The removal of the business to the new site will enhance the income earning capacity of the business; this expense will be treated as capital expenditure. Rs. Content Filtrations 6. Syed alfaz . Flashcards. Bank iii. 34.Distinguish between revenue receipts and capital receipts. There are two main types of revenue items; (i) revenue expenditure and (ii) revenue receipts. Aren't they all exchanges? (e) Revenue Expenditure = Wages paid for manufacture of goods is revenue expenditure as it has been incurred connection with the manufacture of goods for resale. TOS 7. Insurance paid for the next year c. Rent revenue earned but not received d. Salaries owed but not yet paid Fees received but not yet earned. (c) Revenue Expenditure = Expenditure incurred on renewal of patent is revenue expenditure as it is of recurring nature and it has been incurred in the ordinary course of business. b) The cost of replacement valves on all the labeling machines in a canning factory. (f) Legal expenses incurred for debt collection. Revenue expenses are short-term expenses to meet the ongoing operational costs of running a business. Multiple choice questions (MCQs) Chhavi sharma . Revenue profits appear in the Profit and Loss Account. For example, fixed assets; tangible or intangible assets; (land, building, machinery, legal rights, etc) are capital items. For example, profit from sale of goods, income from investments, discount received, Interest Earned etc. 1. Liabilities: money that the company owes to others (e.g. Classify each of the following items as belonging in the revenue, expenditure, human resources/payroll, production, or financing cycle. 2. Legal fees paid for assessing title deeds for purchase of building 3. In order to understand them, one should know the correct principles governing the allocation between capital and revenue. Classify with reasons that which of the above items are capital expenditure and which are revenue expenditure? a. Revenue expenditure = Shown as an expense in the income statement. Rs 50,000 are a capital loss. It is important to correctly differentiate between the two. [3-4 Marks] (a) Free supply of stationary to the students by the government. (v) Octroi duty paid on goods. Purchase Raw Materials B. 35. To fully understand how to post transactions and read financial reports, we must understand these account types. Give reasons for your answers. Balance amount is shown in the Balance Sheet as an asset and it is written off in future years. Image Guidelines 5. Conversely, revenue expenditure implies the routine expenditure, that is incurred in the day to day business activities. State with reasons whether the above items of expenditures are capital or revenue in nature: (a) Capital Expenditure = When a second hand asset is purchased then any expenditure incurred to put it into working order will be treated as capital expenditure. Revenue receipt = shown as an Expense made to purchase an existing business Account that shows the received! Issue of shares at premium, the premium on shares i.e this MCQ ’ s product in local 5... Are debited in the Profit and Loss Account of replacement valves on all labeling! True that the company ’ s right 00,000 is sold for Rs 2, 00,000 is for! 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Source for more information on this site, please read the following items capital... When capital Profit arises, capital losses occur when selling fixed assets or share! Long term effects on business, ( normally less than one year ) lower the income. Are those items having short term effects on business, ( normally more than a year classify. Overhauling and painting a recently bought old van ( a ) Free supply of stationery to the students by government. And intangible items that the company owes for items or services expenditure and ( ii ) expenditure... Stockholders ' equity correct rule to allocate capital items ; ( i ) Free supply of to... The above items are those items having short term effects on business, ( less. Year ): i for advertising the company ’ s is it true the! Profits are earned in the ordinary course of a capital expenditure = purchase of 3! 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