Introduction
One key aspect of this to classify different items which help increase the profits. The point here is that it gives transparency of reporting and creates trust for the company. In this guide, we’ll explore how these items affect the preparation of final accounts.
I. Understanding Capital and Revenue Items
1. What is Capital Expenditure?
Capital Expenditure (CapEx) refers to funds used by a company to acquire, upgrade, and maintain physical assets, such as property, plant, equipment (PP&E), technology, or other items.
Detailed Explanation:
- Long-Term Benefit:
- Increase in Earning Capacity:
- Non-Recurring Nature:
Examples:
- Buildings and Machinery
- Computer Systems
- Land Purchase
2. What is Revenue Expenditure?
Revenue expenditure refers to short-term expenses incurred in the daily operations.
Characteristics:
- Short-Term Benefit:
- Recurring Nature:
- Maintaining Earning Capacity:
Examples:
- Purchase of inventory
- Salaries
- Rent
- Utilities
3. What are Capital Receipts?
Capital receipts are inflows of money that do not arise from the normal course of business operations. These receipts typically impact a company’s assets or liabilities and are not expected to recur regularly.
Characteristics of Capital Receipts:
- Non-Operating Activities:
- Impact on Assets/Liabilities:
- Non-Recurring Nature:
Examples:
- Proceeds from shares
- Proceeds from the sale of machinery
4. What are Revenue Receipts?
Revenue receipts are inflows of money that arise from the normal course of business operations. These transactions are part of a company’s day-to-day activities and typically recur frequently.
Characteristics
- Operations:
- Operations:
- Recurring in Nature Impact: -Short Term profits
Example:
- Cash
- Commissions
- Dividends
II. Impact on Final Accounts
Understanding how capital and revenue affect the financial statements requires seeing where it is going with different line items:
1. Impact on Balance Sheet
It increases the long-term revenue streams by impacting assets, equity and long-term liabilities.
2. Impact on Profit & Loss
It has a direct impact in the profit and loss account. These are seen as a reduction in the income, as they are spent within the same period.
Conclusion
Knowing how capital and revenue items affect the financial statements prepares CA Foundation students to understand about all the expenses and profits. If you have any questions about anything, please let us know.