Capital and revenue expenditure and receipts

Financial Accounting · Unit IV · Topic 11 of 14 · 4 min read

The tests that separate capital from revenue expenditure, deferred revenue expenditure, capital and revenue receipts, capital and revenue profits and losses, why the distinction decides the profit, and the January 2026 classification list solved.

← All Financial Accounting topics Past papers

On this page

1. Why the distinction matters
2. Capital expenditure
3. Revenue expenditure
4. Deferred revenue expenditure
5. Capital and revenue receipts
6. Worked problem: January 2026 classification
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. “Classify the following into revenue and capital items” (January 2026, 6 marks: installing lights and fans, special subscriptions, honorarium to a surgeon, match expenses from a match fund, legacies, installation of new machinery). Six items, each with a one-line reason. The syllabus places this topic in Unit IV because the same distinction separates the Income and Expenditure Account from the Balance Sheet of a non-trading concern.

1. Why the distinction matters

Revenue items go to the Trading and P&L Account (or, for a club, the Income and Expenditure Account) and affect the profit of the year. Capital items go to the Balance Sheet and affect the profit only gradually, through depreciation. If a capital expenditure is wrongly charged to revenue, profit is understated and an asset disappears from the balance sheet; if a revenue expenditure is capitalised, profit is overstated and the balance sheet shows an asset that does not exist. Both falsify the accounts, and the second is a common method of window dressing.

2. Capital expenditure

Expenditure that brings a benefit lasting more than one accounting year, by acquiring a fixed asset, or by increasing the earning capacity or life of an existing one, or by reducing its operating cost. Examples:

Purchase of land, building, machinery, furniture, vehicles.
Costs of bringing an asset to working condition: freight, import duty, installation charges, erection, trial run (AS 10).
Legal charges and stamp duty on purchase of property.
Additions and extensions: a new wing of a building, installation of lights and fans.
Major overhaul of a second-hand machine on purchase, to make it usable.
Purchase of goodwill, patents and trade marks.

3. Revenue expenditure

Expenditure whose benefit is used up within the year, incurred to run the business or to maintain assets in working order without adding to their capacity:

Purchase of goods for resale; wages; salaries; rent; electricity; advertisement.
Repairs and maintenance of existing assets; replacement of worn parts.
Depreciation; interest on loans; insurance premium.
In a hospital or club: honorarium to doctors, salaries, tournament expenses.

4. Deferred revenue expenditure

Revenue expenditure that is unusually heavy and whose benefit lasts a few years — a large advertising campaign to launch a product, heavy expenditure on moving the factory. Traditionally it was spread over three to five years and the unwritten part shown as a fictitious asset. Under the current accounting standards most such costs (advertisement, research, preliminary expenses) must be written off in the year incurred, so the concept is now mainly of historical importance; state both positions in an answer.

5. Capital and revenue receipts

Capital receipts	Revenue receipts
Capital brought in by the owner	Sales of goods
Loans raised	Commission, interest, dividend, rent received
Sale proceeds of fixed assets	Discount received
Club: entrance fees (if capitalised), life membership fees, legacies, specific donations	Club: annual subscriptions, general donations, sale of old newspapers
Shown in the Balance Sheet	Shown in the P&L / I&E Account

Capital and revenue profits and losses. Profit on sale of a fixed asset is a capital profit; loss by fire of a building is a capital loss. They are not part of the ordinary trading result. Capital profits are generally credited to a capital reserve; in a sole trader’s or club’s accounts the profit or loss on sale of a fixed asset is usually shown in the P&L or I&E Account as a separate line.

6. Worked problem: January 2026 classification

Item	Nature	Reason
Cost of installing lights and fans	Capital expenditure	New fixtures, benefit for several years
Special subscriptions received for a special purpose	Capital receipt	Earmarked; credited to a special fund in the Balance Sheet
Honorarium paid to a surgeon in the hospital	Revenue expenditure	Recurring cost of running the hospital
Match expenses met out of match fund	Revenue in nature, but deducted from the Match Fund	Charged against the specific fund, not the I&E Account
Legacies received	Capital receipt	Non-recurring gift by will; added to capital fund
Installation charges of a new machinery	Capital expenditure	Part of the cost of the asset (AS 10)

Borderline items. Repairs are revenue, but repairs to put a newly bought second-hand asset into use are capital. Wages are revenue, but wages paid to workmen for installing a new machine are capital. A legacy is capital unless the will directs it to be spent as income, or it is very small. Answer by the test — does the benefit last beyond the year, and does it add to an asset? — not by the name of the item.

How this is examined

The 6-mark classification problem (January 2026) is the usual form; a theory question “Distinguish between capital and revenue expenditure with examples” is the other. Lay out the answer as a table with a reason in each row. For the theory, give a definition of each, the tests, five examples of each, and a paragraph on deferred revenue expenditure.

Now try the real questions: Financial Accounting past question papers.