Classify the following items into revenue expenditure and capital expenditure. Is it true that the higher the depreciation, the lower the net income? (Delhi 2010) (i) Wealth tax (ii) Value added tax 2, 50,000. Classify each of the following items according to (1) whether it belongs on the income statement (IS) or balance sheet (BS) and (2) whether it is a revenue (R), expense (E), asset (A), liability (L), or stockholders' equity (SE) item Capital Stock Such profits are (a) transferred to Capital Account or (b) transferred to Capital Reserve Account. I think it is better to go through this MCQ’s. To fully understand how to post transactions and read financial reports, we must understand these account types. Give two examples of each. capital expenditure and revenue expenditure. If capital losses are huge, it is common to spread them over a number of years and a proportionate amount is charged to Profit and Loss Account every year. (f) Legal expenses incurred for debt collection. For example, repairs, wages, salaries, fuel, etc., are revenue items. The Questions and Answers of Classify the following items as revenue receipts, revenue expenditure, capital receipts and capital payments? Interest received. (d) Capital Expenditure = Purchase of business means purchase of its assets and liabilities; therefore, it is a capital expenditure. It is important to correctly differentiate between the two. So, it is important to classify the Capital and Revenue Items. Revenue losses arise during the normal course of business. TOS 7. Reply. They are shown in the asset side of Balance Sheet. Revenue expenses are short-term expenses to meet the ongoing operational costs of running a business. (d) Payment made to purchase an existing business. Another example, suppose a company issues its shares of the face value of Rs 100 for Rs 110 each, i.e. 2. (b) Capital Expenditure = The wages paid to workmen employed for extension of building is a capital expenditure, because wages have been incurred in extension of a non-current asset. (D) Revenue Profits: Revenue Profits are earned in the ordinary course of business. State with reasons whether the fallowing items of expenditure are capital or revenue. To a large extent, accounting attempts to resolve these issues by relying upon the statement preparer's subjective judgements. (E) Capital Losses: Capital losses occur when selling fixed assets or raising share capital. This is often referred to as trade payables. (ii) Carriage paid on goods purchased. (d) Annual service costs for a … Disclaimer 9. State with reasons whether the above items of expenditures are capital or revenue in nature: (a) Capital Expenditure = When a second hand asset is purchased then any expenditure incurred to put it into working order will be treated as capital expenditure. Fees received but not yet earned. (f) Revenue Expenditure = Legal costs incurred on debt collection is a revenue expenditure; being incurred to avoid a revenue expense of bad debts. Classify the following items as either revenue or capital expenditure: (a) An extension to an office building costing £24,000. This is a current liability account that shows the amount a company owes for items or services purchased on credit. Purchase raw materials b. is also a revenue receipt. STUDY. Purchases v. Unsold Stock vi. Rs 50,000 are a capital loss. Ram (Customer) viii. 4. Classify the following items as (a) accrued revenue, (b) accrued expense, (c) unearned revenue, or (d) prepaid expense: 1. [3-4 Marks] (a) Free supply of stationary to the students by the government. Classify the following items into capital and Revenue . Capital Loss is not shown in the Profit and Loss Account. The following are the types of capital and revenue items in accounting: Capital Receipts is the amount received in the form of additional Capital (by issuing shares) loans or by the sale proceeds of any fixed assets. Image Guidelines 5. Interest Received x. Mohan (Proprietor) Solution: Question 6. Cost of goods sold. Classify the following items as either revenue or capital expenditure: a) An extension to an office building costing £24,000. Revenue Profits are earned in the ordinary course of business. Bank Overdraft vii. Purchase Raw Materials B. Expenses incurred for advertising the company’s product in local newspaper 5. (d) Capital Expenditure = Amount expended on freight and carriage and installation charges of the new machine into working condition. Sales iv. Shares of the face value of Rs 100 issued at Rs 95, i.e. There are two main types of of capital items; (i) capital expenditure and (ii) capital receipt. For example, profit from sale of goods, income from investments, discount received, Interest Earned etc. (iv) Octroi duty paid on machinery. 4. Revenue expenditure = Shown as an expense in the income statement. In order to know the fair performance and financial standing of a business; the nature of business transactions taking place during the year has to be analyzed. Find out which are Assets, Liabilities, Capital, Revenue or Expense Accounts: i. 2. Rs 50,000 are a profit of capital nature. Home - (e) Revenue Expenditure = Wages paid for manufacture of goods is revenue expenditure as it has been incurred connection with the manufacture of goods for resale. Capital profits are earned as a result of selling some fixed assets or in connection with raising capital for the firm. Purchase of Building 2. Rs 10 is capital profit. Rent Revenue is ; it stockholders' equity. (d) The freight, carriage and the installation charges cost on new machine amounting to $400. If the loss is manageable, they are debited to Profit and Loss Account of the same year. Salaries paid to staff 4. (iii) Transportation paid on machinery purchased. Revenue profits appear in the Profit and Loss Account. For instance, sale of goods, loss may incur. Conversely, revenue expenditure implies the routine expenditure, that is incurred in the day to day business activities. Capital Reserve ap­pears in the Balance Sheet as a liability. Capital Expenditure is an expense made to acquire an asset or improve the capacity of the asset. 1. Advertising Expense is a(n) ; it stockholders' equity. Let us learn more about them. A building purchased for Rs 2, 00,000 is sold for Rs 1, 50,000. cash, computer systems, patents) 2. (c) Expenditure incurred on renewal of patent’s right. Capital Receipts are shown in Balance Sheet. (v) Octroi duty paid on goods. d. Carriage paid on goods purchased. Answer the following questions in depth .... 1. (e) Revenue Expenditure = The expenditure is related to purchase of goods for resale, which itself is a revenue expense, therefore, carriage is also a revenue expense. Legal fees paid for assessing title deeds for purchase of building 3. Revenue Re­ceipts are shown in the Profit and Loss Account. Giving reasons, classify the following into direct and indirect tax. Classify each of the following items as belonging in the revenue, expenditure, human resources/payroll, production, or financing cycle. An expense is a word very similar to expenditure but expense shows the deduction in the value of the asset while expenditure simply denotes the obtaining of as… Classify the following items as issuance of stock, dividends, revenues, or expenses. b) The cost of replacement valves on all the labeling machines in a canning factory. A two-year premium paid on insurance policy. For example, fixed assets; tangible or intangible assets; (land, building, machinery, legal rights, etc) are capital items. Plagiarism Prevention 4. Expenditure means spending on something. (c) Capital Expenditure = The removal of the business to the new site will enhance the income earning capacity of the business; this expense will be treated as capital expenditure. Balance amount is shown in the Balance Sheet as an asset and it is written off in future years. Learn. Receipts and invoices keep the records of expenditures. This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. b. (a) Capital Expenditure = The benefit of this expenditure will be available for a number of years; therefore, it is capital expenditure. Classify the following items into revenue expenditure and capital expenditure. The five account types are: Assets, Liabilities, Equity, Revenue (or Income) and Expenses. IAS 1 sets out the overall requirements for financial statements, including how they should be structured, the minimum requirements for their content and overriding concepts such as going concern, the accrual basis of accounting and the current/non-current distinction. (g) Capital Expenditure = Legal expenses incurred in purchasing landed property are capital expenditures, as part of the cost of a non-current asset purchased. Cash ix. A D V E R T I S E M E N T. 4 Comments on . (c) Expenditure on the construction of computer lab in school by the government. Oil change for the delivery truck: b. mortgages, vehicle loans) 3. Capital items are those items which have long term effects on business, (normally more than one year). (b) Wages paid to business’ workers for extension of its building. There are two main types of of capital items; (i) capital expenditure and (ii) capital receipt. Liabilities: money that the company owes to others (e.g. issue of shares at premium, the premium on shares i.e. Classify each of the following items as owner's drawings, revenue, or expense: a) advertising expense b) service revenue c) insurance expense d) salaries and wages expense e) owner's drawings f) rent revenue g) utilities expense Such losses are debited in the Profit and Loss Account. Aren't they all exchanges? Classification of these transactions reflects in the final statements of the company. Classify the following accounts into assets, liabilities, equity, expenses or income. Revenue receipt = Shown as income in income statement. Interest: These are braodly classified into two categories, i.e. Module 2: Capital & Revenue Expenditure Classify the following expenditure/income into capital and revenue with reasons: 1. The following transactions are taken from the books of H. Hanson for the first week of January 2019: (a) Cost of the air-conditioning the office of director. Classify the following items as capital or revenue expenditure : (i) An extension of railway tracks in the factory area; (ii) Wages paid to machine operators; (iii) Installation costs of new production machine; (iv) Materials for extensions to foremen’s offices in the factory; (v) Rent paid for the factory; (vi) Payment for computer time to operate a new stores control system; (vii) Wages paid to own employees for building … (g) Legal expenses incurred in purchasing a landed property. Capital receipt = Shown as a liability or reduce the value of a capital expenditure. But the range is wider than that. Give reason for your answer. Dividends is ; it stockholders' equity. e. Donation received for constructing a swimming Pool. a. (All India 2011) Ans.Difference between revenue receipts and capital receipts. (b) The cost of replacement valves on all the labelling machines in a canning factory. It is the incomes earned from selling merchandise, or in the form of discount, commission, interest, transfer fees etc. Give reasons for your answers. Non-Tax Revenue: Non-Tax revenue refers to receipts of the government from all sources other than those of tax receipts. 3. Smaller-scale software initiative or subscription. Then indicate whether each item increases or decreases stockholders’ equity. For “Classify the following as direct and indirect taxes”, refer HOTS. This amount is utilised for meeting Capital losses. Rs. Examples of revenue and capital expenditures. Multiple choice questions (MCQs) Chhavi sharma . Reply. Revenue items are those items having short term effects on business, (normally less than one year). 3. Why do accountants have to classify items as capital or revenue expenditures? 50,000 spent for railway siding. The amount of discount is a capital loss. For example, profit from sale of goods, income from investments, discount received, Interest Earned etc. It is also defined as items that are considered as long-give assets of a firm or items that occupy the assets section in a balance sheet called Capital Items. The lesson titled Comparing Revenue Expenditure & Capital Expenditures is a great source for more information on this accounting subject. Capital and revenue items. Back to: Capital and revenue items (quizzes) Show your love for us by sharing our contents. According to modern approach, the accounts are classified as asset accounts, liability accounts, capital or owner’s equity accounts, withdrawal accounts, revenue/income accounts and expense accounts. 2. Contact us - About us - Privacy policy, Effects of Incorrect Treatment of Capital and Revenue Items, Capital Expenditure and Revenue Expenditure, Double Entry for Expenses and Incomes (Revenues), Absorption Costing Approach or Total Costing, Accounting for Assets, Liabilities and Capital, Bad Debts and Provision for Doubtful Debts, Books of Original Entry and Division of Ledger. In order to understand them, one should know the correct principles governing the allocation between capital and revenue. Why do you treat exchanges of similar and dissimilar assets differently? discount of Rs 5. Syed alfaz . Insurance paid for the next year c. Rent revenue earned but not received d. Salaries owed but not yet paid (i) Wages paid on the purchase of goods. Salary owed but not yet paid. Capital losses occur when selling fixed assets or raising share capital. Capital expenditures are major investments of capital to expand a company's business. There are two main types of revenue items; (i) revenue expenditure and (ii) revenue receipts. (b) Cost of pulling down an old building in order to replace it by a new one. Definition Revenue Items: Revenue items are those items having short term effects on business, (normally less than one year). Copyright 10. Question 4. Income received by selling waste paper, packing cases etc. 2. (a) Cost of overhauling and painting a recently bought old van. 34.Distinguish between revenue receipts and capital receipts. The accounting transactions may be divided into two categories: (1) Capital transactions (relating to capital items), (2) Revenue transactions (relating to revenue items). A. Classify with reasons that which of the above items are capital expenditure and which are revenue expenditure? Machinery ii. Capital receipt and revenue receipt, both are the very important components of accounting. We'll define them briefly and then look at each one in detail: 1. (b) Capital Expenditure = This is a capital expenditure as it is a part of the total cost of the building. Distinguish between capital and revenue expenditures: Classify the following items as either a capital expenditure or a revenue expenditure (an expense) a. Capital Expenditure Capital expenditure includes costs incurred on the acquisition of a fixed asset and any subsequent expenditure that increases the earning capacity of an existing fixed asset. The following objectives are covered in this lesson: Cash received for services not yet rendered b. You are given a number of accounts below. Loss on sale of old furniture. (c) Revenue Expenditure = Expenditure incurred on renewal of patent is revenue expenditure as it is of recurring nature and it has been incurred in the ordinary course of business. a. X-Ray plant purchased by a hospital. 35. 5. For example, fixed assets; tangible or intangible assets; (land, building, machinery, legal rights, etc) are capital items. (b) Economic assistance given according to Ladli scheme. Flashcards. It is the process of causing a liability by a commodity. Bank iii. The proper allocation of capital items and revenue items are important for the fundamental principles of correct accounting. Following is the list of various accounts. Question: Classify Each Of The Following Items As Belonging In The Revenue, Expenditure, Human Resources/payroll, Production, Or Financing Cycle. Revenue Receipts are the amount received in the ordinary course of a business. Capital expenditure = Shown as a non-current asset in the balance sheet. The business expenditures are of two types:- Capital expenditures Revenue expenditures Capital expenditures Definition and explanation of capital expenditures: An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. For example a land purchased by a business for Rs 2, 00,000 is sold for Rs. Privacy Policy 8. Assets: tangible and intangible items that the company owns that have value (e.g. Fees earned but not yet received. One obvious case in point is the distinction between the ordinary revenue and capital gain nature of transactions; another is the inter-period allocation of expenditure. Subscriptions received in advance by a magazine publisher. (c) The cost of removing plant and machinery to new site. The following points of difference between capital expenditure and revenue expenditure gives the importance of the distinction: 1. are solved by group of students and teacher of Commerce, which is also the largest student community of Commerce. Nice. Capital and Revenue Items Capital Items: The items which have long term effects on business - generally more than a year. Before publishing your articles on this site, please read the following pages: 1. It is not easy to give a correct rule to allocate capital items and revenue items. Accounting Financial Accounting Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense: a. Prohibited Content 3. The distinction between the nature of capital and revenue expenditure is important as only capital expenditure is included in the cost of fixed asset. So far, we’ve spoken mainly about physical revenue expenditures. Which of the following expenditures are capital or revenue, give your reasons? (i) Free supply of stationery to the students by the government ... Classify the following items into capital and revenue: 1. There are two main types of revenue items; (i) revenue expenditure and … Content Guidelines 2. (c) Repairs to the warehouse roof. Content Filtrations 6. c. Sale of old sports materials. The main sources of non-tax revenue are: 1. All of the following are examples of revenue expenditures: Routine repair/update costs on equipment. Revenue profits appear in the Profit and Loss Account. 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