Capital and Revenue Items
In the world of accounting, we divide all money transactions into two main groups. These are Capital items and Revenue items. Capital items relate to the long-term health and wealth of a business. Revenue items relate to the daily running of the business. This classification is the foundation of financial reporting. Capital expenditure is the money spent to buy fixed assets. Fixed assets are items like land, buildings, and machinery. These items stay in the business for a long time.
Concepts (3)
Intangible assets are assets that you cannot touch or see physically. However, they have great value for the business. Examples include brand recognition, intellectual property, and patents.
Intangible assets are assets that you cannot touch or see physically. However, they have great value for the business. Examples include brand recognition, intellectual property, and patents. A mailing list of regular clients is also an intangible asset because it helps earn future profit. These are considered capital investments. In the 2023 UPSC exam, students were asked to identify these from a list. Always remember that the value of a brand is a long-term asset, not a daily expense.
Capital receipts are amounts that create a liability or reduce an asset. Examples include taking a bank loan or selling an old truck. These are not part of the normal profit. Revenue receipts are amounts earned from the main business.
Capital receipts are amounts that create a liability or reduce an asset. Examples include taking a bank loan or selling an old truck. These are not part of the normal profit. Revenue receipts are amounts earned from the main business. For example, a bank earns interest on loans. This interest is a revenue receipt. It happens regularly and is used to calculate the net profit of the bank.
Sometimes, a business spends a huge amount on a revenue item that gives benefits for many years. A common example is a massive advertising campaign for a new product.
Sometimes, a business spends a huge amount on a revenue item that gives benefits for many years. A common example is a massive advertising campaign for a new product. Even though it is an advertisement (usually revenue), the benefit lasts for 3 to 5 years. Therefore, we spread the cost over those years. This is called Deferred Revenue Expenditure. It is shown on the asset side of the Balance Sheet temporarily until it is fully written off.
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