Capital and Revenue Items

Capital and Revenue Items : Understanding the distinction between capital and revenue items is fundamental in financial management and accounting. These terms categorise expenditures and receipts based on their longevity, purpose, and impact on a business's financial statements. Capital items refer to long-term investments that enhance a company's operational capacity or infrastructure, such as machinery and buildings, and intangible assets, such as patents.

What are Capital and Revenue Items?

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Capital item

• Fixed Assets: Land, buildings, machinery, vehicles, and office equipment.
• Long-term Investments: Including investments in securities, bonds, and shares of other companies.
• Intangible Assets: Like patents, trademarks, copyrights, and goodwill.
• Capital Expenditures: Expenses incurred to acquire, improve, or maintain these assets, such as construction costs, installation fees, and significant repairs that extend the useful life of assets.

Revenue Items

• Sales Revenue: Income generated from selling goods or services.
• Operating Income: Revenue from regular business activities, such as service fees or commissions earned.
• Revenue Receipts: Cash inflows from routine business transactions, including sales receipts and service fees.
• Revenue Expenditures: Regular business expenses like rent, salaries, utilities, and administrative costs.

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How are Capital and Revenue Items Different?

Classification of Capital and Revenue Items

• Capital Expenditure: Capital expenditures refer to expenditures made on fixed assets that provide benefits for a period exceeding one year. This includes investments in buildings, machinery, land, office equipment, etc. These expenditures enhance fixed assets' efficiency and productive capacity, reducing production costs and increasing firm sales. Even if unsuccessful, expenditures on acquiring patent rights are treated as deferred revenue expenses.
• Capital Receipt: Capital receipts pertain to amounts received as fixed assets, investments, loans, share issuance, or compensation for asset accidents. These cash inflows increase assets and reduce liabilities without impacting an organisation's profit or loss.
• Capital Profit and Loss: Capital profit refers to profits earned from capital items such as asset revaluation or profits from the sale of debentures at a premium. On the other hand, capital loss includes losses incurred from the sale of fixed assets or losses from debentures issued at a discount. These are reflected as fictitious assets in the balance sheet.
• Revenue Expenditure: Revenue expenditure encompasses expenses that provide benefits for a short period, typically less than a year. It includes regular business expenses like rent, insurance, salaries, and legal charges for defending suits. Expenditures on goods, raw materials, and building maintenance also fall under this category.
• Revenue Receipt: Revenue receipts are generated from day-to-day business activities and are shown in the income statement. These include earnings from sales of goods, fees for services rendered, and other routine incomes. Revenue receipts directly impact a business's profit and loss and contribute to its cash flow.
• Revenue Profit and Loss: Revenue profit arises from routine business activities like commission received, discounts received, and rent received. Conversely, revenue losses occur due to employee fraud, theft of goods, losses from sales, and bad debts.

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