Capital loss and Revenue loss
In order to ascertain the loss incurred by a firm it is important to distinguish between capital losses and revenue losses.
Capital Losses
Capital losses are the losses which arise not from the normal course of business. Loss on sale of fixed asset is an example for capital loss.
Revenue Losses
Revenue losses are the losses that arise from the normal course of the business. In other words, ‘net loss’ – i.e., excess of revenue expenditures over revenue receipts.
Illuatration:
Shyam & Co., incurred the following expenses during the year 2003.Classify the following items under capital or revenue
i. Purchase of furniture Rs.1,000.
ii. Purchase of second hand machinery Rs.4,000.
iii. Rs.50 paid for carriage on goods purchased.
iv. Rs.175 paid for repairs on second hand machinery as soon as it was purchased.
v. Rs.600 wages paid for installation of plant.
Solution
i. Capital expenditure – as it results in the acquisition of fixed asset.
ii. Capital expenditure – as it results in the acquisition of fixed asset.
iii. Revenue expenditure – expenses incurred on purchases of goods for sale.
iv. Capital expenditure – as it is spent for bringing the asset into working condition.
v. Capital expenditure – as it is spent for bringing the asset into working condition.
Illustration
Prasad Pictures Ltd. constructed a cinema house and incurred the following expenditures during the year ended 31.12.2003.
i. Second hand furniture purchased worth Rs.3,00,000.
ii. Expenses in connection with obtaining a license were Rs.30,000.
iii. Fire insurance, Rs.2500 was paid on 1st January 2003 for one year.
iv. During the first week after the release of the cinema, free tickets worth Rs.30,000 were distributed to increase the publicity of the cinema house.
v. The manager’s salary for the year was Rs.60,000.
Classify the above transactions into capital, revenue and deferred revenue expenditures.
Solution
i. Capital expenditure – as the amount spent results in acquisition of fixed assets.
ii. Capital expenditure – as the amount was spent on acquiring a right to carry on business.
iii. Revenue expenditure – amount spent relates to only one year.
iv. Deferred revenue expenditure – it is a heavy advertising expenditure as the benefit will last more than one year.
v. Revenue expenditure–incurred for the functioning of business.
Illustration
Hari & Co. incurred the following expenses during the year 2003 Classify the expenses as capital and revenue.
i. Rs.750 spent towards replacement of a worn out part in a machinery.
ii. Rs.1,500 spent for legal expenses in relation to raising of a loan for the business.
iii. Rs.300 spent for ordinary repairs of plant.
iv. Rs.6,000 spent on replacing a petrol driven engine by a diesel driven engine.
v. Electricity charges Rs.1,200 per month.
Solution
i. Capital expenditure – as it helps to increase the working condition of the machinery.
ii. Capital expenditure – as it is spent as it helps to get a capital receipt.
iii. Revenue expenditure – as it is spent for the maintenance of the asset.
iv. Capital expenditure – as it helps to reduce cost of production.
v. Revenue expenditure – expenditure incurred in the normal course of the business.
Illustration
Fashion Textiles gives the following transactions of their firm during the year 2003, you are required to classify the transactions into capital or revenue.
i. Rs.2,500 spent on purchasing a tyre for their lorry.
ii. They had old machinery of value Rs.10,000 was sold for Rs.9,500.
iii. They received Rs.5000 towards dividend form their investments in shares.
iv. They were able to sell cotton ‘T’ shirts ( cost Rs. 1,200 ) for Rs.1,500.
v. Rs.600 was spent on alteration of a machinery in order to reduce power consumption.
Solution
i. Revenue expenditure – as it spent to replace a part of the lorry.
ii. Capital loss Rs.500 – as they have incurred a loss on sale of fixed asset and Rs.9,500 will be a capital receipt as it is a sale of fixed asset.
iii. Revenue receipt – earned in the ordinary course of business.
iv. Revenue receipt – Rs.300 is received in the ordinary course of business.
v. Capital expenditure – as it reduces cost of production.
Illustration
Bharat company has incurred the following expenditure you are required to identify the capital, revenue and deferred revenue expenses.
i. Rs.60,000 travelling expenses of their sales manager who travelled to Japan to attend a meeting in order to increase sales – trip was quite successful.
ii. Rs.500 spent for installing machinery.
iii. Rs.6,00,000 spent on research and development.
iv. Rs.500 paid for fuel.
Solution
i. Deferred revenue expenditure – benefit likely to be enjoyed for more than one year
ii. Capital expenditure- amount is spent to bring the asset into use.
iii. Deferred revenue expenditure – the benefit can be spread for more than one year
iv. Revenue expenditure- spent for the normal functioning of the firm.