Concept of Capital and Revenue Transactions [Notes with PDF]

There are numerous transactions in the business every day. All transactions can be divided into two parts on the basis of utility. I.e. capital transactions and revenue transactions.

Over the period, capital transactions provide more benefits than revenue transactions. Revenue transactions take place on a regular basis while capital is rare or irregular.

There are other aspects or features to distinguish between these two types of transactions.

So far, we’ve seen the transaction-is it cash or accrual, visible or invisible, and other things? Transactions can be considered in the following respect-

What is Capital Transactions?

Transactions that provide long-term benefits (more than one year), the amount of which is larger and not regular in occurrence, are known as capital transactions.

What is Revenue Transactions?

On the other hand, transactions that take place on a daily basis, the sum of which is comparatively smaller and repetitive in nature, are referred to as revenue transactions.

Difference between Capital and Revenue Transaction

SubjectCapital TransactionsRevenue Transactions
Benefit consume from the transactionLong termShort term
Recurrence of transactionsIrregularRegular
Amount of transactionLargeSmall

Classification of Capital and Revenue Transactions

The classification of capital and revenue transactions are as follows:

Concept of capital and revenue transactions

Capital Receipts and Income

Receipts that are irregular, the amount of which is larger and the benefits of which are more than one year, are known as capital receipts.

In business capital, loans took from the bank, sale of fixed assets (land, building, furniture, machinery, etc.) are examples of capital receipts.

Difference between Capital Receipts and Capital Income

However, capital receipts and capital income appear to be synonymous, but the difference is identical. Capital income is a part of the capital receipts.

Capital income does not occur on a daily basis and there are not many instances of this. For example, after using an old Motor Vehicles for a few years, it is sold for $8,000 and its current book value is fixed at $6,000. In this case, the capitalistic income is 2,000 = (8,000-6,000). It should be noted that the capitalistic receipt of $8,000 is not the actual capitalistic income.

If it is noted that any costs incurred in connection with this sale procedure are deducted for the calculation of capital income.

Capital Expenditure

All expenditure of a non-recurring nature, the benefits of which the business enjoys for a long time, is called capital expenditure.

Fixed asset (land, furniture, machinery, motor vehicles, etc.) purchase, other expenditure related to the purchase of fixed assets (import, freight, carriage, installation costs, etc.) is known as capital expenditure.

It should be remembered here that expenditure that increases the life or volume of the asset will also be regarded as a capital expense.

Example: $10,000 is added to the existing old machinery to make it work to increase the life of the machine. It can be said that the expenses, which will ensure further use over the period, will be part of the capital expense.

Revenue Receipts and Income

All recurring receipts by way of ordinary income or business profit, which are used to meet day-to-day business expenses, are called revenue receipts.

Examples of revenue receipts are sales proceeds of goods, interest on money deposited in a bank, rent received, Commission received, etc.

Difference between Revenue receipts and Revenue Income

These two sound similar, however, but there is a difference between them. Not all revenue receipts are to be treated as income at a certain time.

For example, rent received $8,000 in 2018, of which $2,000 is adjusted for 2019. Here the revenue receipt is $8,000, but the revenue income is $6,000.

Revenue Payments and Expenses

The recurring expenses of the organization are to run the business and the utility of which expires within a short time is called the revenue expense.

Purchase of goods, rent paid, salary paid, purchase of stationery, advertising expenses, etc. are examples of revenue expenses. Revenue Expenditures do not acquire wealth, rather they contribute to the maintenance of assets.

Difference between Revenue payments and Revenue expenses

However, revenues payments and expenses are similar, but there is a significant difference.

Revenue expense is only a part of the revenue payment. Often the advances, due for the previous accounting period and the next accounting period are paid in connection with the expenditure for the current year.

The total amount paid together for the current, previous, and next accounting years is revenue payments, only the current portion will be considered revenue expense.

If the maintenance cost of a fixed asset does not affect its lifespan, it will be reported as a revenue expense.

The need to distinguish between capital and Revenue transactions

A business person needs to assess his or her economic and financial condition after a certain period of time (usually one year).

For this purpose, at least three statements need to be prepared-comprehensive income statement, a statement of changes in equity, and a statement of financial position.

From the comprehensive income statement, we came to know the amount of profit and loss, from the changes in the equity statement, the amount of the owner’s interest in the business, and from the statement of financial position, we will be able to know the assets and liabilities of the business.

The profit and loss of a business are determined in the preparation of a comprehensive income statement based solely on capital and income and expenses.

On the other hand, the assets, the liability, and the Owner’s Equity are determined in the preparation of the statement of financial position on the basis of the capital receipts and capital expenditure.

If these two types of transactions are exchanged in the financial statement, the actual profit or loss and the asset, liability, and equity of the owner can never be identified.

For this reason, it is necessary for differentiating between capital and revenue transactions.

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