How to categorise the items as capital or revenue by an example?

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Let us consider different scenarios about capital and revenue and therefore, understand their categorisation respectively.

  •  Proprietor contributed the amount as his capital.

Nature − Comes under capital receipt.

Reason − Benefits of this contribution is for a long period of time.

  •  Amount realized by selling old furniture.

Nature − Comes under capital receipt.

Reasonv Purchasing furniture comes under capital expenditure; sale of furniture comes under capital receipt.

  •  Acquiring fixed assets by borrowing money from banks.

Nature − Capital receipt.

Reasonv Benefits enjoyed by business for a long time.

  •  Money received from a debtor who was previously written off as bad.

Nature − Revenue receipt.

Reason − Previously written off account treated as revenue expenditure, amount received from the same debtor treated as revenue receipt.

  •  Old machinery sold at $15000, initial cost of machinery is $10000.

Nature − Capital receipt ($15000)

Nature − Capital profit ($5000)

Reason − Furniture initial cost was $10000 and sold it for $150000 with profit of $5000. $15000 is recorded as capital receipt and $5000 as capital profit.

  •  Motor car sold at $40000, the book value of the motor car was $5000.

Nature − Capital receipt ($40000)

Nature − Capital loss ($ 10000)

Reason − Motor car sold for $40000, having a book value of $50000. It means, he sold the car for a loss of $10000. Amount received ($40000) goes to capital receipt and loss occurred ($10000) goes to capital loss. Loss occurred in this case is not in ordinary course.

  •  Company sold their shares and got $ 1500000.

Nature − Capital receipt

Reason − Benefits from the amount received will have a long term effect.

  •  Expense on shares issued amounted to $2000.

Nature − Capital expenditure.

Reason − Because, it is used to raise the business capital.

  •  Plant and machinery sold for $35000 and replaced new machinery at $ 2000000. Book value of plant and machinery are $5600000 and $2200000 respectively.

Nature − Capital receipt ($35000)

Nature − Capital expenditure ($200000)

Reason − Amount from sale of portion ($35000) treated as capital receipt. The difference is book value and machine sold goes as depreciation. New machinery cost is treated as capital expenditure

  •  Fixtures and fittings appear in the book as $50000. Some portion of $12000 was discarded and sold off to $15000 and acquired new furniture for $10000.

Nature − Capital receipt ($15000)

Nature − Capital profit ($3000)

Nature − Capital expenditure ($10000)

Reason − Difference between book value and machine sold ($3000) is treated as capital receipt. New machinery cost ($10000) is treated as capital expenditure. Sale realized value ($15000) is treated as capital receipt.

Updated on 08-Jul-2021 07:01:22