Q.2 Distinguish between Capital Budget and Revenue Budget. Explain the components of both these Budgets. 

Model Answer

Difference between capital and revenue budget 

ASPECT 

CAPITAL BUDGET 

REVENUE BUDGET 

Definition

A plan for long-term investments in assets that will benefit the organization for multiple years

A plan for day-to-day operations, including income and expenses for a specific period (usually one year)

Purpose

To fund major projects, acquisitions, or improvements that will provide long-term benefits

To manage regular, recurring financial activities and ensure short-term financial stability

Timeframe

Long-term 

Short-term 

Financial Impact

Affects the balance sheet by increasing assets and long-term liabilities

Affects the income statement by recording revenues and expenses

Examples

Infrastructure development, defense purchases, public enterprises

Salaries, subsidies, interest payments, grants

 

Components Of Revenue and Capital Budget 

Components of Capital Budget 

Capital Receipts:

  • Loans from the Public: Borrowings from the public through the issuance of government bonds.
  • Loans from Foreign Governments and International Organizations: Borrowings from entities like the World Bank, IMF, etc.
  • Disinvestment: Proceeds from the sale of government stakes in public sector enterprises.
  • Recovery of Loans: Repayments received from states and union territories.

Capital Expenditure:

  • Infrastructure Development: Investments in roads, bridges, railways, airports, etc.
  • Health and Education: Building hospitals, schools, and universities.
  • Defense: Purchase of military equipment and construction of defense infrastructure.
  • Public Enterprises: Investments in public sector companies.

Components of Revenue Budget 

Revenue Receipts

  • Tax Revenue: Income from taxes like income tax, corporate tax, GST, customs duties, etc.
  • Non-Tax Revenue: Income from sources other than taxes, such as interest receipts, dividends from public sector enterprises, fees, and fines.

Revenue Expenditure

  • Salaries and Pensions: Payments to government employees and pensioners.
  • Subsidies: Financial support for food, fertilizers, and fuel.
  • Interest Payments: Payments on the interest of loans taken by the government.
  • Grants: Financial assistance to states and other entities. 

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