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33. Revenue and Capital Expenditure, and Revenue and Capital Receipts

Final Accounts in Relation to Capital and Revenue Items

A final account is a general term used in bookkeeping for the account where the profit or loss of the business is determined at the end of the accounting period.

Examples of final accounts for the trader are his Trading Account and Profit and Loss Account; for the manufacturer, they are his Manufacturing Account, Trading and Profit and Loss Account; and for a non-profit making organization, it is its Income and Expenditure Account.  

Note that the balance sheet is not an account.  It is a statement.

It is important to distinguish between a revenue expenditure and a capital expenditure, and between a revenue receipt and a capital receipt because only revenue items appear in the final accounts.

Revenue expenditure is considered as an expense and must be debited to the final account, whereas revenue receipts are revenue of the business and must be credited; whereas revenue receipts are revenue of the business and must be credited to the final account. 

On the other hand, capital expenditure or capital receipt is not brought to the final account.

Revenue Expenditure

Revenue expenditure are cost incurred for the day-to-day running expenses of the business.  They include the purchase of stock for resale, purchase of services such as employee's wages, electricity, water, cost of carriage of goods, stationery, and depreciation on fixed assets.

These items of revenue expenditure can only be used once.  For example, a business bought $120 worth of stationery for office use at the beginning of the trading year.  If $100 worth of stationery was used up during the year, this $100 worth of stationery will case to have any more value to the business because its value is 'lost' once it is used.  It must not be thought that such expenditure is wasted.  It just ceases to have any value in itself once it is used.

Income is normally earned from this revenue expenditure.  For example, electricity expense enables a supermarket to provide all the basic amenities needed to attract customers.  Should there be a power failure in the supermarket, sales revenue would be adversely affected as very few customers would be keen to shop there.  

The total amount of revenue expenditure incurred during a particular period, whether paid for or not, must be charged against the profits of that period in the final account.  

Capital Expenditure

Capital Expenditure are payments for the purchase of assets that can be used over and over again in the business.  Normally, such assets can last for more than one accounting period.  

The capital expenditure also adds to the value of an existing fixed asset.  The benefit of such expenditure to be derived by the business are spread over a number of years according to the lifespan of the fixed asset.  

For example, expenditure spent on the purchase of a new piece of machinery to be used in the business is a capital expenditure.  This expenditure will not be taken to the final account but rather to the Balance Sheet as an increase in the value of the assets.

Revenue Receipts

Revenue receipts refer to receipts from the normal activities of the business.  For example, revenue receipts of a trading organization are receipts from sale of goods, discounts received, commission received and interest on bank deposits.  

All revenue receipts earned for a particular period, whether payments for them have actually been received or not, have to be credited to the Trading and Profit and Loss Accounts.  These will increase it profits.

Capital receipts

Capital receipts refer to receipts that is derived from sources other than the normal trading activities of the business.  It may comprise capital paid by partners, or in the case of a limited company, sums received from its shareholders or debenture holders, loans and proceeds from the sale of its assets.

Summary

The difference between revenue expenditure and capital expenditure, and capital and revenue receipt can be summarized in the following as follows:

Difference Between Revenue Expenditure and Capital Expenditure

     

Difference Between Revenue Receipt and Capital Receipt