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Karnataka Class 12 Commerce Accountancy Capital and Revenue Items

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items : Accountancy refers to a systematic knowledge of accounting. It explains “why to do” and “how to do” of various aspects of accounting. It tells us why and how to prepare the books of accounts and how to summarize the accounting information and communicate it to the interested parties.

Accounting refers to the actual process of preparing and presenting the accounts. In other words, it is the art of putting the academic knowledge of accountancy into practice.

Accounting is the language of business. It records business transactions taking place during the accounting period. Accounting communicates the result of the business transactions in the form of final accounts. With a view to make the accounting results understood in the same sense by all interested parties, certain accounting assumptions, concepts and principles have been developed
over a course of period.

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items 

Capital Expenditure:

An expenditure which results in the acquisition of permanent asset which is intended to be permanently used in the business for the purpose of earning revenue, is known as capital expenditure. These expenditures are ‘non-recurring’ by nature. Assets acquired by incurring these expenditures are utilized by the business for a long time and thereby they earn revenue. For example, money spent on the purchase of building, machinery, furniture etc. Take the case of machinery-machinery is permanently used for, producing goods and profit is earned by selling those goods. This is not an expenditure for one accounting period, machinery has long life and its benefit will be enjoyed over a long period of time. By long period of time we mean a period exceeding one accounting period.

Moreover, any expenditure which is incurred for the purpose of increasing profit earning capacity or reducing cost of production is a capital expenditure. Sometimes the expenditure even not resulting in the increase of profit earning capacity but acquires an asset comparatively permanent in nature will also be a capital expenditure.

It should be remembered that when an asset is purchased, all amounts spent up to the point till the asset is ready for use should be treated as capital expenditure. Examples are: (a): A machinery was purchased for $50,000 from Karachi. We paid carriage $1,000, octroi duty $500 to bring the machinery from Karachi to Lahore. Then we paid wages $1,000 for its installation in the factory. For all these expenditures, we should debit machinery account instead of debiting carriage A/c, octroi A/c and wages A/c. (b): Fees paid to a lawyer for drawing up the purchase deed of land, (c): Overhaul expenses of second-hand machinery etc. (d): Interest paid on loans raised to acquire a fixed asset etc.

Examples:

  1. Purchase of furniture, motor vehicles, electric motors, office equipment, loose tools and other tangible assets.
  2. Cost of acquiring intangible assets like goodwill, patents, copy rights, trade marks, patterns and designs etc.
  3. Addition or extension of assets.
  4. Money spent on installation and erection of plant and machinery and other fixed assets.
  5. Wages paid for the construction of building.
  6. Structural improvements or alterations in fixed assets resulting in an increase in their useful life or profit earning capacity.
  7. Cost of issue of shares and debentures (certain expenditures are incurred by the companies when share and debentures are issued).
  8. Legal expenses on raising loans for the purchase of fixed assets.
  9. Interest on loan and capital during the construction period.
  10. Expenditures incurred for the development of mines and plantations etc.
  11. Money spent to bring a second-hand asset into working condition.
  12. Cost of replacing factory building from an old place to a new arid better site.
  13. Premium given for a lease.

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items 

Revenue Expenditure:

All the expenditures which are incurred in the day to day conduct and administration of a business and the effect-of which is completely exhausted within the current accounting year are known as “revenue expenditures”. These expenditures are recurring by nature i.e. which are incurred for meeting day today requirements of a business and the effect of these expenditures is always short-lived i.e. the benefit thereof is enjoyed by the business within the current accounting year. These expenditures are also known as “expenses or expired costs.” e.g. Purchase of goods, salaries paid, postages, rent, traveling expenses, stationery purchased, wages paid on goods purchased etc.

This expenditure is incurred on items or services which are useful to the business but are used up in less than one year and, therefore, only temporarily increase the profit-making capacity of the business.

Revenue expenditure also includes the expenditure incurred for the purchase of raw material and stores required for manufacturing saleable goods and the expenditure incurred to maintain the- fixed assets in proper working conditions i.e. repair of machinery, building, furniture etc.

Examples:

Following are the examples of revenue expenditure.

  1. Wages paid to factory workers.
  2. Oil to lubricate machines.
  3. Power required to run machine or motor.
  4. Expenditure incurred in the ordinary conduct and administration of business, i.e. rent, , carriage on saleable goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.
  5. Repair and maintenance expenses incurred on fixed assets.
  6. Cost of saleable goods.
  7. Depreciation of fixed assets used in the business.
  8. Interest on borrowed money.
  9. Freight, cartage, octroi duty, transportation, insurance paid on saleable goods.
  10. Petrol consumed in motor vehicles.
  11. Service charges to motor vehicles.
  12. Bad debts.

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items 

Difference between revenue and capital items

Revenue Expenditure

Capital Expenditure

1.Its effect is temporary, i.e. the benefit is received within the accounting year.1.Its effect is long-term, i.e. it is not exhausted within the current accounting year-its benefit is received for a number of years in future.
2.Neither an asset is acquired nor the value of an asset is increased.2.An asset is acquired or the value of an existing asset is increased.
3.It has no physical existence because it is incurred on items which are used by the business.3.Generally it has physical existence except intangible assets.
4.It is recurring and regular and it occurs repeatedly.4.It does not occur again and again. It is nonrecurring and irregular.
5.This expenditure helps to maintain the business.5.This expenditure improves the position of the business.
6.The whole amount of this expenditure is shown in trading P & L A/c or income statement.6.A portion of this expenditure (depreciation on assets) is shown in trading & P & L A/c and the balance is shown in the balance sheet on asset side.
7.It does not appear in the balance sheet.7.It appears in the balance sheet until its benefit is fully exhausted.
8.It reduces revenue (profit) of the business.8.It does not reduce the revenue of the concern. Purchase of fixed asset does not affect revenue.

Example:

State with reasons whether the fallowing items of expenditure are capital or revenue.

(i) Wages paid on the purchase of goods.

(ii) Carriage paid on goods purchased.

(iii) Transportation paid on machinery purchased.

(iv) Octroi duty paid on machinery.

(v) Octroi duty paid on goods.

(vi) A second-hand car was purchased for $7,000 and $5,000 were spent for its repairs and overhauling.

(vii) Office building was whitewashed at a cost of $3,000.

(viii) A new machinery was purchased for Rs.80,000 and a sum of Rs.1,000 was spent on its installation and erection.

(ix) Books were purchased for $50,000 and $1,000 were paid for carrying books to the library.

(x) Land was purchased for $1,00,000 and $5,000 were paid for legal expenses.

(xi) $50,000 were paid for customs duty and freight on machinery purchased fromJapan.

(xii) Old furniture was repaired at a cost of $500.

(xiii) An additional room was constructed at a cost of $15,000.

(xiv) Damages paid on account of the breach of contract to supply certain goods.

(xv) Cost of replacement of an old and worn out part of machinery.

(xvi) Repairs to a motor car met with an accident.

(xvii) $10,000 paid for improving a machinery.

(xviii) Cost of removing plant and machinery to a new site.

(xix) Cost of acquiring the goodwill of an old firm.

(xx) Cost of redecorating a cinema hall.

(xxi) Cost of putting up a. gallery in a cinema hall.

(xxii) Compensation paid to a director for loss of his office.

(xxiii) Premium paid on the redemption of debentures.

(xxiv) Costs of attending a mortgage.

(xxv) Commission paid on issue of debentures.

(xxvi) Cost of air-conditioning the office of the director of a company.

(xxvii) Repairs and renewal of machinery.

(xxviii) Cost of acquiring patent rights and trade marks.

(xxix) Compensation paid to workers for termination of their services.

(xxx) Compensation paid to a person injured by company’s car.

(xxxi) Expenditures incurred on alteration in windows ordered by municipal authorities.

(xxxii) Painting expenditures of a newly-constructed factory.

(xxxiii) Expenditures incurred on renewal of patent.

(xxxiv) Expenditures on replacement of a slate roof by a glass roof.

(xxxv) $10,000 spent on dismantling, removing and reinstalling machinery and
fixtures.

(xxxvi) legal expenses incurred in an income tax appeal.

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items 

Solution:

 Sr. No.Nature of Expenditure  Reasons
Wages A/C is debited.(i) Revenue
expenditure
Wages paid on goods purchased and a revenue expenditure because goods purchased are meant for resale. It is recurring by nature as goods are purchased repeatedly in a business.
Carriage A/c is debited.(ii) Revenue
expenditure
The carriage paid on purchases is a revenue expenditure because goods purchased are meant for resale and whenever goods are purchased carriage is paid to bring the goods to the god own of the business.
Machinery A/c is debited instead of transportation A/c.(iii)Capital expenditureA machinery purchased is useless until it is brought to the business. As machinery is a fixed asset and transportation paid is an additional cost to the machinery, so it is a capital expenditure.
Machinery A/c is debited instead of octroi duty A/c (iv)Capital expenditureOctroi duty paid on machinery is also an additional cost to the machinery, If it is not paid, the machinery cannot be taken to the business, so it is a capital expenditure.
Octroi duty A/c is debited.(v) Revenue
expenditure
Octroi duty paid on goods is a revenue expenditure because goods mean saleable goods. It is recurring and is paid repeatedly whenever goods are purchased.
For both expenditures motor car A/C is debited(vi)Capital expenditureA second-hand car is a fixed asset as it “can be used for many years and its utility does not diminish in one year, so it is a capital expenditure. But it is useless if it is not made good to work, so the amount spent on its repair and overhauling is also a capital expenditure.
White washing A/c is debited.(vii) Revenue
expenditure
Whitewashing of a building is necessary for its maintenance and because of this expenditure the profit earning capacity of the business has not increased, so it is a revenue expenditure.
Machinery A/c debited for all
expenditure.
(viii)Capital expenditureMachinery is a permanent asset of the business and can be used for many years but it will benefit to the business until it is installed and erected at a proper place. So amount spent on purchase of machinery, on its installation and erection is capital expenditure.
For bath expenditures Books
A/c is debited.
(ix)Capital expenditureFixed asset “Books” has been acquired and can be used for many years. Cost of carrying books is regarded as a part of purchase price of the books, so it is a capital expenditure.
Land A/c is debited.(x)Capital expenditureLand purchased is a fixed asset. All expenses’ connected with its acquisition are regarded as a part of its purchase price.
Machinery A/c is debited.(xi)Capital expenditureMachinery is a fixed asset. All expenses connected with its import from Japan are regarded as a part of its purchase price, So it is capital expenditure.
Repair A/c is debited.(xii) Revenue
expenditure
Value of furniture does not increase as a result of
its repair — it is simply kept in a proper working condition.
Building A/c is debited.(xiii)Capital expenditureThis is an addition to a fixed asset and as a result of this expenditure the value of the building has increased, so it is a capital expenditure.
Damages A/c or general expenses is debited.(xiv) Revenue
expenditure
In this case the goods have not been supplied by the business to the customer according to the contract between them. The customer claimed damages which the business paid. It is a usual thing that happens in ordinary course of trading, so it is a revenue expenditure.
Repair and maintenance A/c
is debited.
(xv) Revenue
expenditure
A worn out part of the machinery is simply the cost of repair and maintenance of fixed asset. The value and profit earning capacity of the machinery has not increased in any way, so it is a revenue expenditure.
Repair to car A/c is debited.(xvi) Revenue
expenditure
Cost of repair to a motor car does not increase the value of the car, it is simply incurred to put back the car into working condition, so it is a Revenue expenditure.
Machinery A/c is debited.(xvii)Capital expenditureCost has been incurred to ‘improve (h machinery. It increases the value and profit earning capacity of the machinery, so it is capital expenditure.
Plant and , Machinery A/c is debited.(xviii)Capital expenditurePlant and machinery have been removed to a new site in order to increase their profit-earning capacity, so cost of removal is a capital expenditure.
Goodwill A/c is debited. (xix)Capital expenditureGoodwill is an intangible asset and it will benefit to the business for many years. So cost of acquiring goodwill (using the name of an old firm) is always a capital expenditure.
Re-decoration ‘A/c or Maintenance A/c is debited.(xx) Revenue
expenditure
Generally a cinema hall is decorated regular and re-decorating cost is a recurring expenditure Moreover, it will not add to the capacity of the hall, so it is a revenue expenditure.
Cinema hall A/c or Building ‘ debited. (xxi)Capital expenditureAs a gallery has been put up in the cinema hall, it increases the capacity of the hall, which in turns enhances the profit-earning capacity of the business, therefore, the cost is treated as a capital expenditure.
Expense A/c is debited.(xxii) Revenue
expenditure
Compensation paid to the director of a company ,for the loss of his office is a revenue expenditure because the company will get the benefit of this expenditure only for one year.
 (xxiii)Capital expenditureBy issuing debentures, money is borrowed from the public for a long period of time and is used in the purchase of fixed assets or on the expansion of the business, therefore, premium paid is a capital expenditure.
 (xxiv)Capital expenditureMortgage means a deed showing that the money has been borrowed (loan raised) by mortgaging assets as collateral security. The assets will remain mortgaged with the lender until the loan has been repaid. So the assets have been utilized for raising loan and the costs attending the mortgage is, therefore, a capital expenditure.
 (xxv)Capital expenditureDebentures are considered as borrowed capital and are used for the acquisition of fixed assets such as machinery etc., therefore, commission paid on issue of debentures is a capital expenditure.
 (xxvi)Capital expenditureBy making the office of the director, air-conditioned, the efficiency of the director will increase and it will last for many years, so cost of air-conditioning is a capital expenditure.
Repair A/c is debited.(xxvii) Revenue
expenditure
Annual repair and renewal of machinery is necessary to keep it in a proper working condition, therefore, this expenditure is considered as a revenue expenditure.
 (xxviii)Capital expenditurePatents and trade marks are intangible assets, the benefit of, which is received for many years, so cost of acquiring these assets is a capital expenditure.
 (xxix)Capital expenditureBy terminating inefficient workers, the business will run more economically and profit-earning capacity of the business will increase, so compensation paid to them is a capital expenditure.
 (xxx) Revenue
expenditure
It happened in the ordinary course of business, so, compensation paid to the injured person is a revenue expenditure.
 (xxxi) Revenue
expenditure
This expenditure will add nothing to the value of the building and will have no effect on the profit-earning capacity of the business, so it is a revenue expenditure.
 (xxxii)Capital expenditureAmount spent on painting a new factory is regarded as a part of the cost of factory building, therefore, it is a capital expenditure.
 (xxxiii) Revenue
expenditure
If patent is renewed annually, then it is a revenue expenditure as it has been incurred in the ordinary course of business.
 (xxxiv)Capital expenditureAs a slate roof is replaced by a glass roof, it will increase the efficiency of the building and therefore, it is a capital expenditure.
 (xxxv) Revenue
expenditure
Amount of $10,000 spent on dismantling removing and re-installing machinery an fixtures will be treated as revenue expenditure. may be treated as deferred revenue expenditure item and spread over a number of years.
 (xxxvi) Revenue
expenditure
This expenditure has been incurred in the ordinary course of the business being expense o carrying on the business, therefore, it is a revenue expenditure.

Karnataka Class 12 Commerce Accountancy Capital and Revenue Items 

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Karnataka Class 12 Commerce Accountancy Capital and Revenue Items 

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Karnataka Class 12 Commerce Accountancy Capital and Revenue Items Books to downloadDownload Link
  • Non Profit Organisations book
  • Need for Maintaining of Accounts books by Non Profit Organisation
 

  • Accounting book 1
 

  • Accounting book 2
  • Accounting book 3

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