Capital and Revenue

Concept and Meaning of Capital and Revenue

Capital and revenue have an important role for achieving the objective of an organization. Without acknowledgment of capital and revenue, an organization cannot prepare the final account or financial statement. Capital is the source of the basis of revenue. In other words, capital is invested in the business to earn revenue. The relation between capital and revenue is like a tree and its fruits. Capital is a tree which produces fruits and revenue is a fruit which can be consumed.

The following capital and revenue concepts are relevant for accounting purpose

• Capital expenditures and revenue expenditures

• Capital receipts and revenue receipts

• Capital losses and revenue losses

• Capital profits and revenue profits

• Capital reserves and revenue reserves

Capital Expenditures and Revenue Expenditures

Capital Expenditures

Capital expenditure is a major investment of a capital that is done by a company to maintain its business and earn an additional profit. The expenditures which generate revenue or income are called capital expenditure. Capital expenditure is spent by enterprises on purchase of fixed assets which are not intended to resale in the business. Capital expenditure helps in increasing production volume or decreasing a cost of production. Such expenditures are shown on the asset side of balance sheet. Capital expenses are for the purchase of long-term assets, such as facilitating or manufacturing equipment. Those assets provides income generating values for the period of year.

Revenue Expenditures

Revenue expenditure is the short term expenses required to meet an ongoing operational need in the business. In another word, that expenditure which is incurred in connection with the operation and administration of daily activities of the business is called revenue expenditure. Benefits of revenue expire within a year. Expenditure of revenue is shown on a debit side of the trading and profit and loss accounts.Revenue expenses include repairs and regular maintenance as well as repainting and renewal expenses of available assets too. Revenue expenditure incurred in acquiring raw materials for manufacturing process or finished goods for resale.

Capital Receipts and Revenue Receipts

Capital Receipts

Capital receipts is an amount received as a capital from the owner and as a loan from outsiders. Cash earned by selling shares, debentures and permanent assets are also known as capital receipt. It is of a non-recurring type of receipt. The receipts can be generated from the issue of shares, an issue of debt instruments such as debentures, a loan from a bank or financial institution, government grants, claimed insurance claim and much more.

Revenue Receipts

Revenue receipt is an amount generated from the regular transaction of a business. It is the amount received from the sale of goods and services of a business. It is the main source of income which is called as a regular type of income. It is shown on the credit side of the trading and profit and loss accounts. It can also be earned from the sale of waste papers and packing cases.

Capital Losses and Revenue Losses

Capital Losses

Capital losses are those amount which is suffered due to the sale of fixed assets, shares and debentures at a price less than their book value or face value. It does not occur in the normal course of the business but it occurs in the course of selling assets and raising capital. Usually, it is shown on the asset side of the balance sheet and written off out of the capital profit. It is also created by discount on issue shares and debentures.

Revenue Losses

Revenue losses are those amount which can occur in the ordinary course of the business. Due to inefficiency in operating regular activities of the business, revenue loss takes place. It results from the heavy amount of operating expenses and low amount of turnover. It is shown as debit balance on the debit side of the trading and profit and loss accounts. It adversely affects the amount of capital and stability of the business.

Capital Profits and Revenue Profits

Capital Profits

If an organization sells its assets, shares and debenture at a price more than their book values then the excess of book value is said to be capital profit. Similarly, if the assets, shares and debentures are issued at a price more than their face value, then the excess of face value or premium is also called capital profit. Profit of sale of investment, sale of fixed assets and share forfeited amount are also capital profits. Such profits are transferred to capital reserve. It is used for meeting capital losses. It is shown on the liabilities side of balance sheet.

Revenue Profits

Revenue profit, generally, is the difference of revenue income and revenue expenses. It is earned in the ordinary course of the business. For e.g. profit on sale of goods, rent received, interest received, etc. It is shown as gross profit and net profit in trading and profit and loss accounts. Efficiency of the business can be measured through the revenue profits. In fact, earning revenue profit is the main objective of every business.

Capital Reserves and Revenue Reserves

Capital Reserve

Capital reserve is created out of the capital profit which is used to meet capital loss. It is not for the distribution to shareholders as dividend. Capital reserves are shown on the liabilities side of the balance sheet. Sometimes, it can be used to issue fully-paid bonus shares. Profits on revaluation of assets and liabilities can be created on capital reserve.

Revenue Reserve

Revenue reserve is created out of the revenue profit earned in the operation of the business. It refers to the undistributed revenue profit. It can be distributed as dividend to the shareholders. Revenue reserve helps to strengthen the financial position of the company and also helps to declare uniform rate of dividend.

References:

Accounting Management. 25 10 2016 <http://accountlearning.blogspot.com/2010/07/concept-of-capital-and-revenue_07.html>.

Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu

Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu

Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan, Kathmandu