Samacheer Kalvi Class 11 Accountancy Solutions Chapter 11 Capital and Revenue Transactions

I. Multiple Choice Questions

Question 1. Amount spent on increasing the seating capacity in a cinema hall is
(a) Capital expenditure
(b) Revenue expenditure
(c) Deferred revenue expenditure
(d) None of the options
Answer: (a) Capital expenditure
In simple words: When money is spent to add more seats in a cinema hall, it's a big, one-time cost that makes the business more valuable for a long time. This is called capital expenditure because it improves an asset.

🎯 Exam Tip: Capital expenditure increases the earning capacity or reduces operating costs, providing long-term benefits to the business.

Question 2. Expenditure incurred Rs. 20,000 for trial run of a newly installed machinery will be
(a) Preliminary expense
(b) Revenue expenditure
(c) Capital expenditure
(d) Deferred revenue expenditure
Answer: (c) Capital expenditure
In simple words: Money spent on a test run for new machines is part of getting them ready to use. Since it's needed to make the asset operational, it is added to the cost of the machine itself.

🎯 Exam Tip: Any cost incurred to bring a new asset into working condition and place it where it is intended to be used is treated as capital expenditure.

Question 3. Interest on bank deposits is
(a) Capital receipt
(b) Revenue receipt
(c) Capital expenditures
(d) Revenue expenditures
Answer: (b) Revenue receipt
In simple words: The interest you get from money in a bank account is like regular income. It happens often and is part of the normal business activity.

🎯 Exam Tip: Regular income from normal business activities, like interest or sales, is always classified as a revenue receipt.

Question 4. Long term loan for augmenting working capital is
(a) Capital expenditures
(b) Revenue expenditures
(c) Revenue receipts
(d) Capital receipt
Answer: (d) Capital receipt
In simple words: When a business takes a long-term loan, it gets a large amount of money that isn't from daily sales. This money is used for big plans, making it a capital receipt.

🎯 Exam Tip: Capital receipts are generally non-recurring, substantial, and increase liabilities or reduce assets, unlike regular revenue receipts.

Question 5. Revenue expenditure is intended to benefit
(a) Past period
(b) Future period
(c) Current period
(d) Any period
Answer: (c) Current period
In simple words: Money spent on revenue expenditure helps the business right now, in the current accounting year. It's for daily running, not for future big gains.

🎯 Exam Tip: Focus on the time period benefited: revenue expenditure impacts the present, while capital expenditure impacts the future.

Question 6. Pre-operative expenses are
(a) Revenue expenditure
(b) Prepaid revenue expenditure
(c) Deferred revenue expenditure
(d) Capital expenditure
Answer: (d) Capital expenditure
In simple words: Expenses made before a business starts operating, like setting up a factory, are part of the initial investment. These costs are considered capital expenditure because they are necessary to get the business ready.

🎯 Exam Tip: Pre-operative expenses are capitalized if they are directly linked to setting up and bringing an asset or business to working condition.

II. Very Short Answer Type Questions

Question 1. What is meant by revenue Expenditure?
Answer: Revenue expenditure is money spent for the normal day-to-day running of a business. It also includes costs to keep the business's earning power going. These expenses happen often and are used to make money within the current accounting period. For example, buying goods for sale or paying rent and salaries are typical revenue expenditures.
In simple words: Revenue expenditure is money spent on daily business needs and upkeep, helping to earn income in the current period.

🎯 Exam Tip: Remember that recurring nature and benefit to the current period are key identifiers for revenue expenditure.

Question 2. What is capital expenditure?
Answer: Capital expenditure is money spent during an accounting period where the benefits will last for more than one accounting period. This includes any spending that leads to buying a new fixed asset or makes the business better at earning money. Such expenditures do not happen regularly. For example, building a new office is a capital expenditure.
In simple words: Capital expenditure is a one-time cost for assets that help the business for many years.

🎯 Exam Tip: Capital expenditures boost a company's capacity, while revenue expenditures maintain it. This distinction is crucial for financial reporting.

Question 3. What is capital profit?
Answer: Capital profit is the money a business earns from something outside its normal daily operations. For instance, if a company sells an old building or a machine for more than it bought it for, that extra money is a capital profit. This kind of profit is not from selling its usual goods or services.
In simple words: Capital profit is profit from selling old assets, not from everyday business sales.

🎯 Exam Tip: Always distinguish between profit from core business (revenue profit) and profit from one-off asset sales (capital profit) as they impact financial statements differently.

Question 4. Write a short note on revenue receipt.
Answer: Revenue receipts are the funds a business gets from its normal daily activities. These receipts happen regularly, and the amounts involved are usually small compared to capital receipts. For example, money received from selling goods, earning interest on investments, or receiving dividends from shares are all types of revenue receipts. They directly contribute to the company's operating income.
In simple words: Revenue receipts are the regular, smaller amounts of money a business gets from its usual sales and services.

🎯 Exam Tip: Think of revenue receipts as the daily inflow of cash from the main operations of the business, essential for covering operational expenses.

Examples:
• Proceeds from sale of goods
• Interest on investments received
• Respect Received
• Dividend from investment in shares.

Question 5. What is meant by deferred revenue expenditure?
Answer: Deferred revenue expenditure is a type of spending that is revenue in nature but provides benefits for more than one accounting period, usually two or more years. Instead of charging the full amount against income in the year it's spent, the cost is spread out over several years. This happens when a large expense, like a big advertising campaign, has a lasting impact. These expenditures are slowly reduced over their benefit period.
In simple words: It's a big expense that benefits the business for several years, so its cost is spread out over those years instead of all at once.

🎯 Exam Tip: Deferred revenue expenditure is unique because it combines characteristics of both revenue (nature) and capital (benefit period) expenditures.

III. Short Answer Questions

Question 1. Distinguish between capital expenditure and revenue expenditure.
Answer:

🎯 Exam Tip: When distinguishing, always consider the impact on the business's long-term structure versus its short-term operations.

Question 2. Distinguish between capital receipt and revenue receipt.
Answer:

🎯 Exam Tip: Think about whether the money received is part of normal trading (revenue) or a one-off event like selling an asset or taking a loan (capital).

Question 3. What is deferred revenue expenditure? Give two examples.
Answer: Deferred revenue expenditure is an expense that is typically revenue-based but provides benefits over several future accounting periods, usually for two years or more. Instead of recording the entire expense in the year it's incurred, it's spread out over the years it benefits. The portion not yet charged against income is shown on the balance sheet as an asset, and a portion is charged each year. For example, a large advertising campaign might provide benefits for several years, so its cost is deferred.
In simple words: It's a large expense, like a big ad campaign, that helps the business for many years, so its cost is spread out over those years.

🎯 Exam Tip: Focus on the "multi-period benefit" and "spreading the cost" aspects when explaining deferred revenue expenditure.

Examples:
• Considerable amount spent on advertising
• Major repairs to plant and machinery

IV. Exercises

Question 1. State whether the following expenditures are capital, revenue or deferred revenue.
1. Advertising expenditure, the benefits of which will last for three years.
2. Registration fees paid at the time of registration of a building.
3. Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable.
Answer:
1. Deferred revenue expenditure
2. Capital Expenditure
3. Capital Expenditure
In simple words: Big advertising costs spread over years are deferred. Costs to get a new building ready, like registration and initial repairs, are capital expenses.

🎯 Exam Tip: Costs incurred to make an asset ready for its intended use are always capitalized, even if they seem like regular expenses.

Question 2. Classify the following items into capital and revenue.
1. Registration expenses incurred for the purchase of land.
2. Demolishing the old building purchased.
3. Carriage paid on goods purchased.
4. Legal expenses paid for raising of loans
Answer:
1. Capital
2. Capital
3. Revenue
4. Capital
In simple words: Expenses to get land or loans ready are capital costs. Daily shipping costs for goods are revenue.

🎯 Exam Tip: Remember, any expense that prepares an asset for use or facilitates long-term funding is usually capital in nature.

Question 3. State whether they are capital and revenue.
1. Construction of building Rs. 10,00,000.
2. Repairs to furniture Rs. 50,000.
3. White-washing the building Rs. 80,000.
4. Pulling down the old building and rebuilding Rs. 4,00,000
Answer:
1. Capital
2. Revenue
3. Revenue
4. Capital
In simple words: Building new structures or completely rebuilding old ones are capital expenses. Small repairs and routine whitewashing are revenue expenses.

🎯 Exam Tip: Major construction or reconstruction that adds value or life to an asset is capital; routine maintenance is revenue.

Question 4. Classify the following items into capital and revenue.
1. Rs. 50,000 spent for railway siding.
2. Rs. 20,000 spent on demolishing the old building purchased.
3. Carriage paid on goods sold.
Answer:
1. Capital
2. Capital
3. Revenue
In simple words: Building a railway siding and demolishing an old building are capital costs because they are part of setting up a new asset or site. Shipping costs for goods sold are regular business expenses.

🎯 Exam Tip: Costs that prepare a site or asset for use (like demolition or specific construction) are typically capitalized, increasing the asset's value.

Question 5. State whether the following are capital, revenue and deferred revenue.
1. Legal fees paid to the lawyer for acquiring a land Rs. 20,000.
2. Heavy advertising cost of Rs. 12,00,000 spent on introducing a new product.
3. Renewal of factory licence Rs. 12,000.
4. A sum of Rs. 4,000 was spent on painting the factory.
Answer:
1. Capital
2. Deferred Revenue
3. Revenue
4. Revenue
In simple words: Legal fees for land are capital. Big ad costs for new products are deferred. License renewals and routine painting are regular revenue expenses.

🎯 Exam Tip: A new product launch advertising, if substantial and benefiting multiple periods, is a classic example of deferred revenue expenditure.

Question 6. Classify the following receipts into capital and revenue.
1. Sale proceeds of goods Rs. 75,000.
2. Loan borrowed from bank Rs. 2,50,000
4. Commission received Rs. 30,000.
5. Rs. 1,400 wages paid in connection with the erection of new machinery.
Answer:
1. Revenue
2. Capital
3. Capital (This is based on the assumption that the source implies it's for capital asset erection, typically included in wages for installation. The text provided is confusing here as item 3 is missing, and item 5 is not a receipt but an expense. I will treat item 5 as "Wages for erection of new machinery" which is a capital expenditure, meaning the question implicitly has mixed entries.)
4. Revenue
5. Capital
In simple words: Money from selling goods and receiving commission are daily income (revenue). Taking a loan and paying wages to install new machines are big, one-time items (capital).

🎯 Exam Tip: Always analyze if the item is an income or an expense first. Then, for income, check if it's from core operations (revenue) or a financing/asset sale event (capital). For expenses, see if it adds to an asset's value (capital) or maintains operations (revenue).

Question 7. Identify the following items into capital or revenue.
1. Audit fees paid Rs. 10,000.
2. Labour welfare expenses Rs. 5,000.
3. Rs. 2,000 paid for servicing the company vehicle.
4. Repair to furniture purchased second hand Rs. 3,000.
5. Rent paid for the factory Rs. 12,000
Answer:
1. Revenue
2. Revenue
3. Revenue
4. Capital
5. Revenue
In simple words: Audit fees, welfare costs, vehicle servicing, and factory rent are regular operational expenses. Only the initial repair to make a second-hand furniture usable is a capital cost.

🎯 Exam Tip: Regular maintenance and administrative costs are revenue. However, initial repairs on a newly purchased second-hand asset to make it functional are capitalized.

11th Accountancy Guide Capital and Revenue Transactions Additional Important Questions and Answers

I. Choose the correct answer.

Question 1. Expenses on research and development will be classified under
(a) Preliminary expense
(b) Revenue expenditure
(c) Capital expenditure
(d) Deferred revenue expenditure
Answer: (d) Deferred revenue expenditure
In simple words: Money spent on research and development is usually a large amount that brings benefits for many years, so its cost is spread out over time.

🎯 Exam Tip: R&D expenses often have a long-term impact on a company's future earnings, making them a typical example of deferred revenue expenditure.

Question 2. Depreciation on fixed asset is a expenditure.
(a) Capital expenditure
(b) Revenue expenditure
(c) Deferred revenue expenditure
(d) None of the options
Answer: (b) Revenue expenditure
In simple words: Depreciation is the cost of an asset losing value over time, which is treated as a regular operating expense each year.

🎯 Exam Tip: Although depreciation relates to capital assets, it's an accounting allocation of cost over time, making it a revenue expense in the profit and loss statement.

Question 3. Revenue receipts are in the business.
(a) non-recurring
(b) recurring
(c) neither of the options
(d) A AND B
Answer: (b) recurring
In simple words: Revenue receipts, like sales income, happen regularly as part of a business's normal operations.

🎯 Exam Tip: The recurring nature is a primary characteristic that distinguishes revenue receipts from capital receipts.

Question 4. An plant worth Rs. 8,000 is sold for Rs. 8,500 the capital receipt amounts to
(a) Rs. 8,000
(b) Rs. 8,500
(c) Rs. 500
(d) Rs. 165
Answer: (c) Rs. 500
In simple words: When a plant is sold for more than its book value, the extra money received is considered a capital gain. This gain adds to the company's capital.

🎯 Exam Tip: Capital receipt in this context refers to the profit made from selling a fixed asset for more than its cost, not the entire sale price.

Question 5. An asset worth Rs. 1,00,000 is sold for Rs. 85,000 the capital loss amounts to
(a) Rs. 85,000
(b) Rs. 1,00,000
(c) Rs. 15,000
(d) Rs. 70000
Answer: (c) Rs. 15,000
In simple words: If an asset is sold for less than its original value, the difference is a capital loss. This loss reduces the company's capital.

🎯 Exam Tip: Capital loss is calculated as the original value (or book value) minus the selling price of the asset.

Question 6. An asset worth Rs. 1,00,000 is sold for Rs. 75,000 the capital loss amounts to
(a) Rs. 1,75,000
(b) Rs. 1,00,000
(c) Rs. 75,000
(d) Rs. 25,000
Answer: (d) Rs. 25,000
In simple words: The capital loss is found by subtracting the selling price from the asset's worth. In this case, 1,00,000 minus 75,000 equals 25,000.

🎯 Exam Tip: Always clearly identify the asset's value and its selling price to correctly calculate capital gain or loss.

Question 7. Transaction which provide benefit to the business for more than one year is called as
(a) Capital expenditure
(b) Revenue expenditure
(c) Deferred revenue expenditure
(d) None of the options
Answer: (c) Deferred revenue expenditure
In simple words: If a business expense is revenue-like but helps for more than one year, its cost is spread out, making it a deferred revenue expenditure.

🎯 Exam Tip: This question highlights the core characteristic of deferred revenue expenditure: a revenue nature but a multi-period benefit.

Question 8. Revenue expenditure is intended to benefit.
(a) Subsequent year
(b) previous' year
(c) current year
(d) None of the options
Answer: (c) current year
In simple words: Revenue expenditure helps the business in its current operations and within the current financial year.

🎯 Exam Tip: This confirms that revenue expenditures are short-term and directly support the earning activities of the ongoing accounting period.

II. Very Short Answer Type Questions

Question 1. What is revenue loss?
Answer: Revenue loss, also known as net loss, occurs when a business's total revenue expenditures are greater than its total revenue receipts. This means the costs of running the business for its normal daily operations are more than the money it earned from those operations. It shows that the business is not making enough money to cover its regular expenses.
In simple words: Revenue loss happens when a business spends more on its daily running than it earns from its normal sales.

🎯 Exam Tip: Revenue loss is different from capital loss; it specifically reflects the inefficiency or insufficient income from core business activities.

Question 2. Write a short note on Capital receipt.
Answer: A capital receipt is money received by a business that is not part of its normal operating activities and typically involves a significant amount. These receipts are usually non-recurring and either increase the business's liabilities (like taking a loan) or reduce its assets (like selling a fixed asset). Capital receipts are shown on the liabilities side of the balance sheet. For example, proceeds from issuing shares or debentures are capital receipts. They are crucial for a company's long-term financing and growth, providing funds for major investments rather than daily expenses.
In simple words: Capital receipts are large, one-time amounts of money a business gets, not from regular sales, which either add to its debt or come from selling assets.

🎯 Exam Tip: The two key features of a capital receipt are its non-recurring nature and its impact on the capital structure (assets or liabilities) of the business.

Question 3. Write the Features of capital expenditure?
Answer: Here are the features of capital expenditure:
1. It provides benefits for more than one accounting period.
2. It includes acquiring fixed assets and all costs incurred to make an asset ready for use.
3. It helps increase the business's ability to earn revenue.
4. It is not a recurring expense; it happens infrequently.
5. It is shown on the assets side of the balance sheet.
In simple words: Capital expenditure benefits the business for a long time, helps it earn more, is a one-time cost, and is listed as an asset.

🎯 Exam Tip: Focus on "long-term benefit," "asset creation/improvement," and "non-recurring" as the primary features of capital expenditure.

Question 4. Write the Features of revenue expenditure?
Answer: Here are the features of revenue expenditure:
1. It occurs regularly and is recurring in nature.
2. It is spent to maintain the current earning capacity of the business.
3. Its benefit expires within the same accounting period.
4. It is recorded on the debit side of the trading and profit and loss account.
In simple words: Revenue expenditure happens often, keeps the business running, only helps for the current year, and is part of daily financial reports.

🎯 Exam Tip: The key takeaway for revenue expenditure is its "recurring nature" and its role in "maintaining" existing operations, not expanding them.

Question 5. Write the Features of deferred revenue expenditure?
Answer: Here are the features of deferred revenue expenditure:
1. It is a revenue expense, but its benefit is expected over a subsequent period or periods.
2. It is not fully written off in the year it's incurred; instead, it is spread out and written off over a period of certain years.
3. The balance amount not yet written off is shown on the assets side of the balance sheet.
In simple words: Deferred revenue expenditure is a regular-type cost that helps for more than one year, so it's expensed slowly over time and recorded as an asset until fully written off.

🎯 Exam Tip: Emphasize the "revenue in nature" and "benefits multiple periods" aspects to clearly define deferred revenue expenditure.

III. Short Answer Questions

Question 6. Distinguish Capital, Revenue & Deferred revenue expenditure.
Answer: Capital, revenue, and deferred revenue expenditures differ mainly in their nature, purpose, benefit period, impact on earning capacity, and accounting treatment. Understanding these distinctions is crucial for proper financial reporting, as they affect how expenses are recorded and how profits are calculated.

🎯 Exam Tip: When distinguishing between these expenditures, remember that capital items add value or capacity, revenue items maintain existing operations, and deferred items are large revenue-like expenses with multi-year benefits.

Question 1. Classify the following expenditures and receipts as capital or revenue
1. Rs 10,000 spent as travelling expenses of the directors on trips abroad for the purchase of fixed assets.
2. Amount received from trade receivables during the year.
3. Amount spent on demolition of building to construct a large building on the same site.
4. Insurance claim received on account of machinery damaged by fire.
Answer:
1. Capital expenditure: This expense directly relates to acquiring a new fixed asset, which increases the company's long-term value.
2. Revenue receipt: This is money received from normal business operations, such as collecting payments from customers.
3. Capital expenditure: Demolishing an old building to construct a new one on the same site is considered part of the cost of the new capital asset.
4. Capital receipt: An insurance claim for damaged machinery is a one-time receipt not from regular business operations, helping to recover a loss on a capital asset.
In simple words: Spending money to get something big and long-lasting is capital expenditure, while receiving money from selling things or services is revenue receipt. Getting money from an insurance claim on a big asset is a capital receipt.

🎯 Exam Tip: Remember, capital items bring long-term benefits or add to fixed assets, while revenue items are for daily operations or short-term benefits.

Question 2. Classify the following expenses as capital or revenue.
(i) The sum of Rs 3,200 has been spent on a machine as follows:
    Rs 2,000 for additions to double the output.
    Rs 1,200 for repairs necessitated by negligence.
(ii) Overhauling expenses of Rs 25,000 for the engine of a motor car to get better fuel efficiency.
Answer:
(i) a. Capital expenditure: Adding to a machine to double its output increases its capacity and future benefits.
    b. Revenue expenditure: Repairs due to negligence simply restore the machine to its original working condition, which is a regular maintenance cost.
(ii) Capital expenditure: Overhauling an engine to improve fuel efficiency enhances the asset's performance beyond its original state, extending its useful life and benefits.
In simple words: If you spend money to make a machine better or last longer, it's capital spending. If you spend money just to fix it or keep it running as before, it's revenue spending.

🎯 Exam Tip: Distinguish between expenses that enhance an asset's value or life (capital) and those that merely maintain it (revenue).

Question 3. State whether the following are capital or revenue items.
1. Rs 5,000 spent towards additions to buildings.
2. Second-hand motor car purchased for Rs 30,000 and paid Rs 2,000 as repairs immediately.
3. Rs 10,000 was spent on painting the new factory.
4. Freight and cartage on the new machine Rs 150, erection charges Rs 200.
5. Rs 150 spent on repairs before using a second hand car purchased recently.
Answer:
1. Capital expenditure: Additions to buildings increase their value or capacity, providing long-term benefits.
2. Capital expenditure: The cost of repairs made immediately after purchasing a second-hand asset to make it usable is added to the asset's cost.
3. Revenue expenditure: Painting a factory is a routine maintenance expense that keeps it in good condition.
4. Capital expenditure: Freight, cartage, and erection charges incurred to bring a new machine into working condition are part of the machine's initial cost.
5. Capital expenditure: Repairs done to a second-hand car before its first use are necessary to make it operational and are thus capitalized.
In simple words: Money spent to make big assets better or ready to use is capital. Money spent for normal upkeep like painting is revenue.

🎯 Exam Tip: All costs incurred to bring an asset to its working condition, including transportation and installation, are part of its capital cost.

Question 4. State whether the following are capital, revenue or deferred revenue expenditure.
1. Carriage of Rs 1,000 spent on machinery purchased and installed.
2. Office rent paid Rs 2,000.
3. Wages of Rs 5,000 paid to machine operators.
4. Hire charges for the use of motor vehicle, hired for five years, but paid yearly.
Answer:
1. Capital expenditure: Carriage charges for new machinery are essential to make it ready for use, so they are added to the asset's cost.
2. Revenue expenditure: Office rent is a regular, recurring expense necessary for day-to-day operations.
3. Revenue expenditure: Wages paid to machine operators are a direct cost of producing goods or services, incurred regularly.
4. Revenue expenditure: Although the vehicle is hired for five years, the payment is made yearly for its use, which is a recurring operational expense. The benefits are consumed in the current period.
In simple words: Spending on new machines to get them working is capital. Daily costs like rent and operator wages are revenue. Yearly payments for something you use often are also revenue.

🎯 Exam Tip: Recurring operational costs like rent and wages are almost always revenue expenditures, even if a contract spans multiple years, as long as the benefit is consumed periodically.

Question 5. State with reasons whether the following are capital or revenue expenditure
1. Expenses incurred in connection with obtaining a licence for starting the factory for Rs 25,000.
2. A factory shed was constructed at a cost of Rs 2,00,000. A sum of Rs 10,000 had been incurred in the construction of temporary huts for storing building material.
3. Overhaul expenses of second-hand machinery purchased amounted to Rs 5,000.
Answer:
1. Capital expenditure: Obtaining a factory license is a one-time cost essential to start the business, making it part of the initial setup expenses that provide long-term benefits.
2. Capital expenditure: The cost of constructing a factory shed and temporary huts for storing building material, which are necessary for the main construction, are all considered part of the capital cost of the factory.
3. Capital expenditure: Overhaul expenses on newly purchased second-hand machinery are necessary to bring it into efficient working condition for the first time, hence they increase its useful value.
In simple words: Costs to start a factory, build it, or make used machines work properly for the first time are all capital expenses because they create or improve long-lasting assets.

🎯 Exam Tip: Costs that enable a business or asset to begin operations, or significantly enhance its capacity, are generally capitalized.

Question 6. State with reasons whether the following are capital or revenue or deferred revenue expenditure
1. Advertisement expenses amounted to Rs 10 crores to introduce a new product.
2. Expenses on freight for purchasing new machinery.
3. Freight and insurance on the new machinery and cartage paid to bring the new machinery to the factory.
Answer:
1. Deferred revenue expenditure: Large advertisement expenses for introducing a new product are expected to yield benefits over several years, so they are spread out as deferred revenue expenditure.
2. Capital expenditure: Freight expenses for new machinery are necessary costs to get the asset ready for use and are therefore added to the machinery's capital cost.
3. Capital expenditure: All costs like freight, insurance, and cartage paid to bring new machinery to the factory and make it ready for its intended use are part of the capital cost of the machinery.
In simple words: Big ad costs for a new product are spread out over time. Costs to move and set up new machines are capital expenses because they are part of getting the asset ready.

🎯 Exam Tip: Distinguish between large marketing campaigns for new products (often deferred revenue) and direct costs to acquire or set up fixed assets (capital expenditure).