Incorrect treatment of Capital and Revenue Expenditure and Receipts affects the profit for the year and values in the Statement of Financial Position.
Expenses will be shown more. So, the profit for the year will be incorrect in the Income statement.
The Non-current asset will be shown less. So, the Non-current asset value will be incorrect in the Statement of Financial Position.
Unlike revenue receipts, which are obtained during routine business operations, capital receipts are not obtained during routine business operations.
In the case of a firm, capital receipts are often acquired through the issuance of shares, debentures, borrowings, and sales of fixed assets or investments. The selling of things, the provision of services, or the use of business resources generating interest, royalties, and dividends are the usual sources of revenue.
Revenue receipts are often recurrent, whereas capital receipts are typically non-recurring.
Capital receipts from financing activities such as the issue of shares, debentures, and borrowings are shown on the liabilities side of the balance sheet as these receipts create liabilities payable at a future date whereas interest on borrowings is shown as a charge in the Profit and Loss Account and dividends to shareholders are shown as appropriation of profit in the appropriation section of Profit and Loss Account. Interest accrued/outstanding will also be shown as a liability.
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