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CMA Foundation · Fundamentals of Financial and Cost Accounting · Capital and Revenue Transactions

A government grant received by a firm to compensate it for losses of a year already incurred in running its operations is generally treated as:

A grant received to compensate for operating losses already incurred is a revenue receipt and is credited to the Profit and Loss Account. Its purpose is to support the revenue results of the business, whereas a grant given to acquire a fixed asset would be treated as capital in nature.

  1. AA capital receipt credited to the Capital Account
  2. BA revenue receipt credited to the Profit and Loss AccountCorrect
  3. CA liability repayable to the government
  4. DA reduction in the cost of fixed assets

Explanation

A grant meant to make good operating losses or give immediate support is received for revenue purposes, so it is taken to profit and loss as income. A grant tied to acquiring a fixed asset would be capital in nature. Here the grant covers past operating losses, so option 1 is wrong.

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