After reading this article you will learn about the capital and revenue expenditure of a farm business.
Allocation and receipt under Capital and Revenue is important when property is improved there are distinction made between:
1. Permanent improvement.
2. Current improvement.
Permanent improvement appears in B.S. Current expenditures appear in Profit and Loss Accounts Revenue means income but revenue account includes both income and expenditure.
Acquiring assets and which permanently adds to the value and profit earning capacity of an existing asset e.g., purchase of farm land, building erection and heavy repairs.
Expenses incurred in farming operations each year and ordinary losses and expenditures incurred in keeping assets in proper state of efficiency which do not increase their value or profit earning capacity e.g., cost of feed, seeds, manures, repairs of machinery, rent, wages, land revenue, general expenses. The value of assets discarded or totally damaged or destroyed by fire or other reasons are also charged to revenue.
Differed Revenue Expenditure:
It comprises expenditures incurred on items primarily of revenue nature but the effect of which is not exhausted during the current period or a year only and benefits are likely to last for years e.g., improvements affected in land like leveling, fencing and heavy manuring.
The unexhausted portion is carried forward and taken to the Balance Sheet of the year and written off proportionately within a number of years during which its benefits is likely to last.
Comprises any additional capital paid in by the proprietor, any sum received on loan, recoveries from debtors or sale proceeds of any of the assets.
Consists of all incomes or profits arising from the sale of farm produce, sale proceeds if livestock raised on the farm during the year, profits on sales of farm produces stored on the farm brought over from the previous years, profit on the purchase or sale of cattle, rent, interest, discount etc. received, and the amount of hail or fire insurance, if any, received from standing crops injured or destroyed.
Transfer to Final Account:
As capital expenditure and capital receipts are debited and credited to their respective assets and liabilities accounts, their balances are taken to the balance sheet at the close of the year.
Revenue expenditure and revenue receipts being debited and credited to their respective accounts are transferred to profit and loss accounts at the end of the year. Treatment of deferred revenue expenditure has already been explained above.