What is the difference between Revenue Account and Capital Account?
Revenue and Capital Account are the two main accounts of the government.
Revenue account is an account that includes all the revenue receipts and expenditures of business and government whereas Capital Account includes all the capital receipts and expenditures of the government and business.
Let us discuss about Revenue Receipts and Capital Receipts first:
Revenue Receipts: Revenue receipts are those receipts that are received in the conduct of day to day business activities or we can say that they are generated from operating activities of a business and are recurring in nature. The Government can take such receipts in the form of Tax or Non Tax Income. These receipts have a direct impact on the profits and are shown on the Credit side of the Profit and Loss Account. To survive for longer period, such receipts are very useful.
For example: Sales, Interest received , bad debts recovered, Income Tax, Corporate Tax, GST, etc.
Capital Receipts: Receipts other than revenue receipts are called Capital Receipts and these receipts do not affect the profit of any business. Such receipts are non-recurring in nature. They are shown as Liability or Reduction from the Asset in the Balance Sheet.
Capital receipts can be received from Loans and Borrowings, sale of any government asset, issue of shares/debentures, etc.
Now, Let us talk about Revenue Expenditures and Capital Expenditures;
Revenue Expenditures: These are such expenditures which occur in maintaining any asset and after commencement of the business. Such expenditures can take place either in developmental or non-developmental works.
For example : Maintenance of various infrastructures, interest payment, defense, subsidies, grants, salaries, pension, law and order, etc.
This type of expenditure charged fully in the Profit and Loss Account and is recurring in nature.
Capital Expenditure : Such Expenditures occurs when we buy or create any asset. These expenditures increase the earning capacity of the business. It may be incurred before or after the commencement of business and is non-recurring in nature.
For Example : Expenditure on fresh infrastructure, repayment of loan (Principal Amount), Loan to state government, etc.
Capital Expenditure is displayed as asset in Balance Sheet.
In short, we can say that if any expenditure increasing capacity, capability, efficiency and performance of something then it will come under Capital Expenditure and if not then it fall under Revenue Expenditure.
Lets take an example to understand this better:
Suppose you buy any vehicle for your business and after sometime you find out that this vehicle needs to get repaired or maintenance needs to be done so the expenditure that will take place in this process will be considered as revenue expenditure because it did not increase its efficiency or capability. It’s just become normal to use because we have just repaired the damaged item. Similarly if we do some expenditure and that can increase the capacity or capability of any vehicle then that expense would be considered as Capital expenditure.
Want to know more about Revenue Account and Capital Account. Connect with Braj Aggarwal, CPA, P.C team today by filling the below form or you call us on (+1) 718-426-4661 or email us at baggarwal@aggarwalcpa.com
