Accounting – Capital and Revenue
I hope you found the concept of capital and revenue fruitful.
So, let’s understand this a little more. The concept and the basic reason to segregate the balances into capital and revenue indicate that there are two primary classifications to the transactions, one short term, and the other long term. We have talked about this multiple times.
As a consequence, this will lead to two primary reporting documents, one for showcasing the operation results, and the other, the long term one showcasing the strength of the business or the organization. So, the current affairs are covered in the Profit and Loss Account and its variations, for suiting the nature of the business / organization and the Balance Sheet showing the standing as on a certain date. The variations for the profit and loss account come in from the fact that different organizations will have a different nature, different objectives, products or services, profit or non-profit etc. etc.
Within each of these documents, we will also have two columns, one having the debit balances and the other credit balances.
Catch up on the next post to understand the nature of these balances.
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Uttam Kumar Chatterjee
TPM Top Mgt.Advisor & Local Consultant JIPMS Japan Based in India
Thanks Mr Gupta for sharing these useful concepts . Yes , the simplest way to understand is that if we wd like to buy an asset like production equipment, this will have to be budgetted as capital expenditure , whereas the repair and maintenance cost will be treated as variables in the revenue account . As an operational excellence manager, we have to however understand how to calculate the LCC and LCP ( many orgn do DCF yield to work on ROR on current and constant money term) while selecting an equipment .We should note here that by adding such fixed asset , our cost of production will also go up to the extent of the statistical depreciation of the equipment cost besides the repair and maint/opn costs of the same equipment. Hence one of the key objectives should to be to bring down the production costs by stretching utilisation of existing assests by improving OEE and Cap utilisation and defer investment as far as possible .