Page 35 - CA_ELG_Volume I_ELG-Sample

Paper 1 Principles and Practices of Accounting Theoretical Framework 1.25

5. Expenses incurred for obtaining a 5. False. The Cinema theatre cannot com-
license for running the Cinema theatre mence its operations without license.
is revenue expenditure. So, the license expense has to be capi-
talised and hence a CapEx.

6. Amount paid as lawyer’s fee to defend 6. False.The expected future benefit of
a suit contesting ownership of the land the asset does not increase by defend-
is capital expenditure. ing the law suit. Hence the nature of
expenditure is revenue expenses.

1.15 Capital Receipts and Revenue Receipts

Revenue receipts are receipts obtained in course of normal business activities (e.g. receipts
from sale of goods or services, interest income, etc.). These are credited to the profit and
loss account. Revenue receipts should not be equated with actual cash receipts.

Capital receipts are receipts which are not revenue in nature (e.g. receipts from sale
of fixed assets or investments, owners’ contributions, etc.).

Exercises 1.3

Identify whether the following consti- Solution:
tutes revenue receipt or capital receipt.
1. Amount received from sundry 1. Revenue Receipt – Since these receipts

debtor “X” during the year. occur during the normal course of business.
2. Machinery damaged by fire. Insur- 2. Capital Receipt – These receipts do not
ance claim was received for such occur in the normal course of business and
damage. are not reflected through the balance sheet.

1.16 Contingent Liability

Contingent liability is not recognised in the balance sheet, it needs to be disclosed in the
notes to accounts if they are material.
These are continuously assessed to determine whether an outflow of economic
resources are probable. If they are probable, a provision is to be recognised. Figures 1.8
and 1.9 depict the definitions of contingent liability.

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