Question of 40
Q.State which of the following receipts would be treated as capital receipts and revenue receipts and give reasons :
(a) Received Rs. 5,00,000 from the issue of shares and the expenses of issue amounted to Rs. 10,000
(b) Received Rs. 1,00,000 as yearly subsidy from State government
(c) Compensation received from Improvement Trust for compulsory removal of business to another place
(d) Investment which was purchased in 2017 for Rs. 10,00,000 sold for Rs. 12,00,000
(OR)
On 31st December, 2025 a merchant's Profit and Loss A/C showed a credit balance of Rs. 7,000. You find that he has committed certain mistakes and omitted certain entries. Pass necessary entries :
(a) Unexpired Insurance Rs. 300 has not been taken into account.
(b) An amount of Rs. 1,100 paid on wages for erection of new machinery is charged to wages account.
(c) Goods worth Rs. 500 returned to Jamuna Das were included in stock but not entered in the Sales Return Book.
(d) Salaries unpaid Rs. 1,000 had not been taken into account
Manipur CohsemCOHSEM Manipur Higher Secondary 1st Year (Commerce) 2026Subjective· 4mImportance★★★★★est
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Start your 14-day free trial to unlock the full solution →Capital receipts relate to the capital/fixed-asset structure of the business; revenue receipts relate to its normal recurring trading operations.
- Received Rs. 5,00,000 from the issue of shares, expenses of issue Rs. 10,000: This is a Capital Receipt. Money raised by issuing shares increases the owners' capital/long-term funds of the business, not its trading income; it is a one-time, non-recurring receipt related to the capital structure. (The Rs. 10,000 issue expense is a capital expenditure, adjustable against the share proceeds/securities premium.) Net capital receipt = Rs. 5,00,000 (gross receipt); the Rs. 10,000 expense is separately a capital expenditure.
- Received Rs. 1,00,000 as yearly subsidy from State government: This is a Revenue Receipt. Being a recurring, yearly grant meant to support the day-to-day running/operations of the business (not to acquire a capital asset), it is treated as income of a revenue nature and credited to the Profit and Loss Account each year it is received.
- Compensation received from Improvement Trust for compulsory removal of business to another place: This is a Capital Receipt. It compensates the business for the loss/disturbance of its fixed establishment (effectively a capital asset — the business premises/location), not for loss of regular trading income; such a one-time compensation is capital in nature.
- Investment purchased in 2017 for Rs. 10,00,000, sold for Rs. 12,00,000: The sale proceeds themselves are a Capital Receipt (realisation of a capital/fixed asset — the Investment). Of the total Rs. 12,00,000 received, Rs. 10,00,000 merely recovers the original cost, while the profit of Rs. 2,00,000 (12,00,000 − 10,00,000) is a Capital Profit, which may be transferred to Capital Reserve.
| Item | Capital or Revenue Receipt | Reason |
|---|---|---|
| (a) Issue of shares Rs. 5,00,000 | Capital | Raises long-term capital, one-time |
| (b) Yearly subsidy Rs. 1,00,000 | Revenue | Recurring support for operations |
| (c) Compensation for compulsory removal | Capital | Compensates loss of a capital asset (premises/location) |
| (d) Sale of investment Rs. 12,00,000 (profit Rs. 2,00,000) | Capital | Realisation of a fixed/capital asset; profit is a capital profit |
OR
Rectifying journal entries (Profit and Loss Adjustment basis), as on 31st December, 2025 — original net profit Rs. 7,000:
- Unexpired Insurance Rs. 300 not taken into account (a prepaid asset omitted; omission understated profit): Prepaid Insurance A/c Dr. — Rs. 300 To Profit and Loss Adjustment A/c — Rs. 300 (Being unexpired insurance, omitted earlier, now provided for; profit increases by Rs. 300)
- Rs. 1,100 wages for erection of new machinery wrongly charged to Wages A/c (capital expenditure wrongly treated as revenue; profit was understated): Machinery A/c Dr. — Rs. 1,100 To Profit and Loss Adjustment A/c — Rs. 1,100 (Being erection wages wrongly charged to revenue, now capitalised; profit increases by Rs. 1,100)
- Goods worth Rs. 500 returned to Jamuna Das, included in stock, return not recorded: Jamuna Das's A/c Dr. — Rs. 500 To Profit and Loss Adjustment A/c — Rs. 500 (Being the omitted purchases return now recorded; profit increases by Rs. 500) Profit and Loss Adjustment A/c Dr. — Rs. 500 …
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