O Level Accounting (7707)•7707/11/M/J/24
Explanation
Classifying business receipts as capital or revenue Steps:
- Recall definitions: Capital receipts arise from non-operating sources like asset sales or special financing; revenue receipts from core trading operations.
- Analyze first receipt: In a car business, cash payments for hire refer to initial down payments in hire purchase deals, classified as capital receipts since they recover invested capital in assets.
- Analyze second receipt: Proceeds from selling an old vehicle count as revenue, as vehicles are trading stock in a car dealership, forming normal business income.
- Match to choices: First is capital, second is revenue, selecting option C.
Why C is correct:
- Per accounting standards, capital receipts include non-recurring financing like hire purchase initials (IAS 17/IFRS 16 legacy), while revenue receipts cover trading sales of inventory.
Why the others are wrong:
- A: Labels both capital, but vehicle sale is operational revenue, not capital.
- B: Labels first revenue, but hire payments are capital recovery, not operating income.
- D: Labels both revenue, but hire payments are non-operating capital.
Final answer: C
Topic: Capital and revenue expenditure and receipts
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