Revenue, Expenses and Profit
Class 11 Accountancy — Accounting Terminology
Receipts — Revenue vs Capital
Amount received in the normal course of business or from the use of business resources.
Examples:
- Amount received or receivable from sale of goods or rendering of services
- Interest received or receivable for a fixed deposit in a bank
Expenditure — Capital, Revenue, and Deferred
Capital Expenditure
Amount spent or liability incurred for purchasing assets. Incurred to purchase fixed assets or improve existing fixed assets. Increases earning capacity — benefits of enduring nature.
Example: Purchasing machinery for ₹5,00,000
Shown on assets side of Balance Sheet
Revenue Expenditure
Amount spent or liability incurred for purchasing goods or services taken to earn revenue. Benefit consumed within the current accounting period. Direct relationship with revenue.
Example: COGS ₹10,000, Salary ₹20,000
Shown on debit side of Trading A/c or P&L A/c
Deferred Revenue Expenditure
Expenses of revenue nature written off in more than one year. Benefit expected to be available for more than one financial year. Revenue in nature but written off over multiple periods.
Example: Large advertising expenditure spread over several years
Expense — Prepaid and Outstanding
According to R.N. Anthony, “Expense is a monetary measure of inputs or resources consumed.” It represents a value that has expired during the accounting period.
Forms: Cash payments (salaries, wages, rent), Depreciation (writing off fixed assets), Bad debts (writing off current assets), Decline in asset value (investments), Cost of goods sold. Transferred to debit side of Trading A/c or P&L A/c.
Revenue, Income, and Profit
Revenue represents the gross inflow of cash, receivables, or other consideration arising from the ordinary activities of an enterprise. This includes income from sale of goods, rendering of services, and use of enterprise resources by others (yielding interest, dividends, etc.).
Revenue differs from income. Income is the difference between revenue and expenses.
Income Formula
Example: Goods costing ₹15,000 sold for ₹21,000. Interest earned ₹2,000.
- Revenue = ₹21,000
- Other Income = ₹2,000 (interest)
- Expense = ₹15,000 (COGS)
- Income = ₹21,000 + ₹2,000 − ₹15,000 = ₹8,000
Profit refers to the income earned by the business specifically from its Operating Activities. Profit = Revenue from Sale of Goods (₹21,000) − Cost of Goods Sold (₹15,000) = ₹6,000.
Revenue to Profit Flow
Gross Profit
Excess of revenue over direct expenses
Revenue − Direct Costs
Net Profit
Excess of total revenue and other income over total expenses
Total Revenue + Other Income − Total Expenses
If total expenses > total revenue + other income → Net Loss
Net Profit increases Capital, Net Loss decreases Capital
Gain and Loss
Gain is an increase in owner's equity resulting from transactions that are not part of the regular business operations but are incidental to it — often irregular or non-recurring.
Examples: Gain on sale of land, machinery, or investments
Loss occurs when total expenses of a period exceed its revenues and other income. It decreases the owner's equity.
• Losses incurred in operating (business) activities
• Loss of money/money's worth with no benefit received (e.g., cash or goods lost in theft)
• Losses from non-recurring events (e.g., loss on sale of fixed assets)