Explain the Difference Between Capital and Revenue Items of Expenditure and Income

Before we explain the difference between capital and revenue items of expenditure and income, we must know that transactions can be divided into two types according to period of time.

Long Term Period

Long-term period means more than one year and short term period means less than or equal to one year. Transactions having long term period of time are Capital Transactions. Office Furniture, Machinery, Building purchased are examples of Capital Transactions.

Short-term period

Transactions having short term period of time are Revenue Transactions. Examples are Rent paid, Average Salary of an employee paid, fees received, stationary purchased.etc.

As we know expenses in accounting are incurred for the purpose of generating revenues and revenues accounts are calculated by taking the differences between profit and expenses, so Expenses and Revenues (Income) are basically two types of accounts and both are two different types in nature. So Capital and Revenues Expenditures are differentiated with respect to expenses accounts and revenue accounts.

For Expenses

Capital Expenditures (outflows)

Revenue Expenditures (outflows)

For Revenues

Capital Receipts (Inflows)

Revenues Receipts (Inflows)

Capital Expenditures

Expenditures having life more than one year. Examples are office furniture, building, property and plant. These expenditures are called fixed assets or non-current assets. These provide probable future benefits to the business.

Revenue Expenditures

Expenditures having life less than or equal to one year are called revenue expenditures. Examples are salaries paid, rent paid, wages paid, goods purchased, etc. These can be categories as expenses. The benefit which the business gets is of short period of time.

Capital Receipts

Receipts having life more than one year. Examples are disposal on sale of non-current assets, loan from bank, capital invested in the business. Theses receipts are the representation of Long-term Liabilities and Owner’s Equity.

Revenue Receipts

When the receipts have life equal to one or less. Examples are fees received, commission received, goods sold, etc. Revenues receipts fall under Income Statement.

Capital profits

It is earned on the sales of capital expenditures. For example office furniture purchased whose written down value is for Rs.90000 after 5 years sold for Rs.110000. The remaining balance of Rs.20000 is a capital profit.

Revenue profit

The profits earned by the business in operating activities. For example, fees received, rent received.

Capital Loses

Loses that suffered by the business on the capital expenditures. For example, Office Furniture having book value of Rs.70000 sell to Rs.50000, then the capital loss is Rs.20000.

Revenue Loss

This loss is suffered by the business during the operating activities of the business. Examples are loss on sale of selling goods, Bad debts, etc.

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So after Explaining the Difference Between Capital and Revenue Items of Expenditure and Income, we can say that both types of transactions are the basis of the Accounting Cycle and without understanding their accounting treatments, Financial Statements can not show us true and fair view of the Company Businesses.