Capital and Revenue Expenditures and Receipts

Flashcards covering the criteria, distinctions, and accounting treatments for capital and revenue expenditures and receipts as per the Theoretical Framework.

Revenue Expenditure

Expense that relates to the operations of the business of an accounting period or to the revenue earned during the period, where benefits do not extend beyond that period.

Capital Expenditure

Expenditure that generates enduring benefits and helps in revenue generation over more than one accounting period.

Matching Principal

An accounting principle that tells us when and how much of the expenses are to be charged against revenue in the Profit & Loss Account.

Nature of business

A criteria for identifying expenditure where the same item (like furniture) is revenue expenditure for a trader in that item but capital expenditure for any other trade.

Recurring nature of expenditure

A classification factor where expenses incurred frequently in an accounting year (like rent) are revenue, while infrequent transactions (like purchasing assets) are capital.

Productive capacity

The ability of an asset to generate revenue; expenditure that increases this capacity is considered capital in nature.

Materiality of the amount

An important consideration in distinguishing between revenue and capital based on the relative proportion of the amount involved.

Tangible fixed assets

Physical assets, such as machinery or cars, acquired for enduring future benefits and classified as capital expenditure.

Intangible fixed assets

Non-physical assets acquired for enduring future benefits that are represented by capital expenditure.

Revenue Receipts

Receipts obtained in the course of normal business activities, such as from the sale of goods/services or interest income, which are credited to the Profit and Loss Account.

Capital Receipts

Receipts which are not revenue in nature, such as receipts from the sale of fixed assets, investments, loans, or owners’ contributions.

Accrual basis

The accounting method where revenue and capital receipts are recognized as soon as the right of receipt is established.

Pre-operative expense

Expenditure incurred to obtain a license or carry out activities necessary to start a business, which is capitalized and amortized over time.

Prepaid expenses

Future expenses that have been paid in advance and are shown in the balance sheet as an asset.

Maintenance cost

Revenue expenses, such as the replacement of a worn-out part of a machine, incurred as part of normal upkeep to maintain the earning capacity of an asset.