UNIT- 4. ACCOUNTING PROCEDURES
4.1 Capital and Revenue Transactions (Expenditure & Receipts)
Transactions
REVENUE
TRANSACTIONS
-These transactions have a
short term effect on the
business
CAPITAL
TRANSACTIONS -These
transactions have a long
term effect on the business
Capital receipts
Revenue receipts
Capital expenditure
Revenue
expenditure
Capital profit
Revenue Profit
Capital loss
Revenue Loss
Why we should distinct these two revenue types?
The distinction between these two transaction types is very important in ascertaining a business’s
accurate
Financial performance
Which we find out through – Income
Statement
Income
Expenses
Financial position
Which we find out through – Financial Position
Statement
Assets
Capital
Liabilities
Capital Expenditure- CapEx
Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such
as property, plants, buildings, technology, or equipment.
Capital expenditure is money spent by a business on purchasing non-current assets and improving or extending
non-current assets. This is non-recurring (not occurring repeatedly) in nature. These are shown as non-current
assets in the SOFP.
This includes;



All the legal costs incurred in the purchase of non-current assets.
Cost of carriage for the delivery of non-current assets.
Costs of installing non-current assets.
Capital expenditure is recorded in statement of financial position
Ex- Purchase of a motor vehicle – see the below illustration
Purchase of the car
$500,000
Total Cost of purchasing the car-(noncurrent
asset)
=$500,000+$75,000+$100,000+$125,000 =
$ 800,000
Carriage of the car to
office premises $75,000
Taxes on the car
$125,000
Upgrading or
installing the car
$100,000 (not repairs)
How these expenses appear in the Statement of Financial Position.
Revenue Expenditure
Revenue expenditure is money spent on running a business on a day-to-day basis. These are expenses incurred
by a business as a result of producing its products and services. This is recurring (occurring repeatedly) in
nature.
These are shown as expenses in the Income statement.
This includes;
 Administrative expenses Selling expenses
 Financial expenses
 Cost of maintaining and running non-current assets. (Ex- Depreciation of non-current assets, repairing
charges)
 It also includes the cost of goods purchased for reselling purpose.
Revenue expenditure is recorded in income statement
Ex- Water bill paid, Electricity bill paid
Administrative expenses are costs incurred to support the functioning of a business, but which are not directly
related to the production of a specific product or service.
Ex:
Salaries & wages.
Building rent.
Utility Bill Payments
Depreciation on non-current assets.
Non-current asset repairs
Insurance
Office supplies.- cleaning supplies, stationary,
Selling expenses; selling expenses are the costs associated with distributing, marketing and selling a product or
service. Examples;



Distribution costs such as logistics, shipping and insurance costs.
Marketing costs such as advertising, website maintenance and s spending on social media
Selling costs such as wages, commissions and out-of-pocket expenses.
Financial & other expenses; Financial expenses are incurred when your company borrows money from creditors
and lenders. These are hence those expenses that are outside of your company's core business line. For example,
interest on money borrowed, loan origination fees.
How these expenses appear in the Income statement
Revenue - Sales
(-) Sales returns
Opening stock
(+) Purchases
(-) Purchase returns
Stock available for sale
(-) Closing Stock
Cost of goods sold
5,000,000.00
(135,000.00)
4,865,000.00
670,000.00
2,300,000.00
(102,000.00)
2,198,000.00
2,868,000.00
(550,000.00)
GROSS PROFIT
2,318,000.00
2,547,000.00
Administrative Expenses
Salaries & wages.
Building rent.
Utility Bill Payments
Depreciation on non-current assets.
Non-current asset repairs
Insurance
Office supplies.- cleaning supplies, stationary,
Selling Expenses
678,000.00
56,000.00
40,000.00
34,000.00
6,700.00
12,000.00
3,450.00
830,150.00
Revenue Expenditure
shipping and insurance costs.
advertising, website maintenance and s spending on social media
wages for sales representatives
12,300.00
11,000.00
34,870.00
Financial & Other Expenses
Bank loan interest
Bank overdraft interests
Other
60,000.00
7,600.00
9,500.00
58,170.00
(+) Othe incomes
77,100.00
1,581,580.00
55,000.00
Net profit
1,636,580.00
Capital Receipt
A capital receipt occurs when money is received other than from normal trading activities. Means, incoming
cash flows (receipts) originating from the sale of non-current assets, shares, or debt/ loans.
This includes;

The receipts of capital from the owner
Examples
1. Owner Invested Cash to the business $ 200,000
Double Entry
…………………………………………….. Dr.
……………………………………………..Cr.

Receipts from loans
Examples
1. Business Obtained a bank loan $ 700,000
Double Entry
 …………………………………………….. Dr.
……………………………………………..Cr.

Sale proceeds of non-current assets
Example
1. The business sold a motor vehicle for 1,200,000
Double Entry
…………………………………………….. Dr.
……………………………………………..Cr.
Capital receipt is recorded in statement of financial position Profit for sale proceeds of non-current assetsUnder income statement.
Revenue Receipts
A revenue receipt is money received by a business from normal trading activities.
These refer to those receipts that neither reduce the assets of the organization nor create any liability on the
government. Usually, these receipts are recurring in nature, and affect the profit and loss of any business.
These activities include;
1. Revenue from sale of goods
A book store
A textile shop
A supermarket shop
A computer shop
; Sale of books for cash and on credit
; Sale of clothes for cash and on credit
; Sale of different groceries for cash and on credit
: Sale of computers and accessories for cash and on credit
2. Fees from clients / cash received from providing services
A lawyer for providing consultation to a customer ; Client fees
A doctor for his consultation
: Payment from a patient
Teacher for the knowledge
: Fees from students
3. Other income such as rent received, commission received, discount received and etc.
Revenue receipt is recorded in income statement.
Ex- Discount received, Rent received
Other Income
Rent receivables
Interest receivables
Commission
receivables
Discount
receivables
Question 01
Classify following transactions as capital receipt, capital expenses, revenue receipts or revenue expenses.
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
ix.
x.
xi.
xii.
Rent received
Electricity paid
Bank loan obtained
Capital invested by owner
Purchased inventory for reselling
Purchased Office fixtures
Maintenance charges of Air conditioner
Proceeds of sale of Computer
Profit gained by selling computer
Installation cost of Air conditioner
Legal charges for acquiring new premises for office
Dividends received
Question 02
Transaction
Revenue
expenditure
Revenue
receipt
Capital
Expenditure
Capital receipt
Revenue
expenditure
Revenue
receipt
Capital
Expenditure
Capital receipt
Purchased fuel for motor vehicle
Paid for delivery of new motor vehicle
Charge customers for hire of motor
vehicles
Banked proceeds from sale of an old
motor vehicles on scrap value
Question 03
Transaction
Proceeds of sale of motor vehicles
Purchase of motor vehicles
Insurance for motor vehicles
Question 04
Transaction
Revenue
expenditure
Revenue
receipt
Capital
Expenditure
Capital receipt
Sale of motor van
Purchased new motor van tires
Cash discount received
Purchased a new motor van
Question 05
Ajib also incurred the following expenditure.
1.
2.
3.
4.
Delivery of motor van from manufacturer
Fuel for motor van
Signwriting his business name on the motor van
Motor van insurance
Required: State whether each of the items above is capital expenditure or revenue expenditure.
Calculation of capital and revenue transactions
A business has provided the following information for a particular month.
$
Purchased goods for cash
Purchased goods on credit
Bought a computer
Repairs to furniture
Required;
a) Calculate capital expenditure
b) Calculate revenue expenditure
10 000
7 500
15 000
2 500