( Expert )
10 July 2012
Yes,there is a difference between revenue and capital profit, one is charged to p&L A/c and the latter is routed through capital reserve.
I am explaning your doubt by giving two examples:
1. An old machine which originally cost Rs. 90,000 is replaced by a new and
modern one costing Rs. 2,00,000. The old machine is sold for Rs. 15,000. The replacement cost thus amounts to Rs. 1,85,000. Now the question arises as to how much of this amount should be charged as capital expenditure and how much as revenue. For this purpose, you
must know that the replacement involves two aspects: (a) cost of the new machine, and (b)loss on the sale of old machine. In this case the cost of the new machine is Rs. 2,00,000.
This will be treated as capital expenditure because it results in the acquisition of a fixed asset. As for the loss on the sale of old machine, you have to first find out the depreciated
value (book value) of the old machine. Assuming it to be Rs. 25,000, the loss on the sale of old machine works out to Rs. 10,000 (book value Rs. 25,000 - sale value Rs. 15,000). This will be treated as revenue loss and charged to Profit and Loss Account. However, if such
loss is too heavy an amount, it can be treated as deferred revenue
2. Profit case:
Let us take another case. An old machine which originally cost Rs. 90,000 is sold for Rs. 1,00,000 and replaced by a new machine costing Rs. 2.00,000. The book value of the old machine is Rs. 60,000. In this case, there is a profit of Rs. 40,000 (sale value Rs. 1,00,000 - book value Rs. 60,000). Will the whole amount of Rs. 40,000 be treated as revenue profit?
No, the revenue profit in this case is only Rs. 30,000. Whatever amount is realised over and above the original cost is, as per rules, a capital profit. Thus we can say that (a) Rs. 2,00,000,
being the cost of the new machine is a capital expenditure, (b) Rs. 30,000 is a revenue profit,and (c) Rs.10,000 is a capital profit
Hope that your doubt is cleared.