📑 Topics on this page (Jump to Topic):
📌 1. Capital vs Revenue Expenditure
| Basis | Capital expenditure | Revenue expenditure |
|---|---|---|
| Purpose | Acquire a fixed asset or increase its earning capacity | Run day-to-day business and keep assets in working order |
| Benefit period | More than one year | Current year only |
| Nature | Non-recurring | Recurring |
| Treatment | Shown as an asset in the balance sheet | Debited to Trading / P&L A/c |
| Examples | Buying land/building, carriage and installation of machinery, initial repairs of a second-hand machine, buying goodwill/patents | Salaries, rent, repairs and maintenance, purchase of goods, depreciation, insurance |
- Initial repairs to make a second-hand machine usable = capital; later regular repairs = revenue.
- Legal fees for building permission, registration/stamp duty on land = capital.
- Legal costs to defend title to a business property are generally treated as revenue.
📌 2. Deferred Revenue Expenditure
- Revenue expenditure of a large amount whose benefit lasts several years — written off over a few years. Example: a heavy launch advertising campaign, research costs.
- The part not written off is shown on the assets side as a "fictitious asset".
- Note: under AS 26 / Ind AS 38, advertising is now generally expensed in the same year; exams still ask the traditional deferred revenue concept.
📌 3. Capital & Revenue Receipts, Profits & Losses
| Item | Capital | Revenue |
|---|---|---|
| Receipts | Capital introduced, loans raised, sale of fixed assets | Sale of goods, commission, rent, interest, discount received |
| Profits | Selling a fixed asset above book value; premium on shares — to capital reserve | Profit from normal trading — to P&L A/c |
| Losses | Loss on sale of fixed asset, building lost by fire (abnormal) | Theft of goods, bad debts, normal wastage |
⚠️ Exam Traps:
- Purchase of goods is revenue expenditure however large; purchase of machinery is capital.
- Carriage and installation on a machine are added to its cost (capital), but carriage inward on goods is revenue.
- Treating capital as revenue (or vice versa) = an error of principle, which distorts profit.
💡 Memory Tip: Ask: "Will the benefit last beyond one year and does it create or improve a fixed asset?" — if yes, capital.
📌 4. Worked Examples
Example: classifying expenditure
| Item | ₹ | Class |
|---|---|---|
| New machine purchased | 2,00,000 | Capital |
| Freight and installation | 15,000 | Capital |
| Own workers' wages for installation | 5,000 | Capital |
| Repairs to old machine | 8,000 | Revenue |
| Factory insurance premium | 6,000 | Revenue |
Capital expenditure = 2,00,000 + 15,000 + 5,000 = ₹2,20,000 (cost of the machine); revenue expenditure = 8,000 + 6,000 = ₹14,000 (to P&L). If the ₹5,000 installation wages were charged to P&L, profit and the machine would both be understated by ₹5,000.
📌 5. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. Expenditure on installing a new machine is: Practice
Correct answer: (C)
Installation is added to the cost of the machine.
Installation is added to the cost of the machine.
Q2. Regular repairs and maintenance of machinery are: Practice
Correct answer: (D)
It keeps the machine working; it does not raise capacity.
It keeps the machine working; it does not raise capacity.
Q3. Initial repairs to make a second-hand machine usable are: Practice
Correct answer: (A)
It is part of the cost of acquiring the asset.
It is part of the cost of acquiring the asset.
Q4. A heavy advertising campaign for a new product with benefit over several years is traditionally: Practice
Correct answer: (B)
It is written off over a few years.
It is written off over a few years.
Q5. Money received from selling an old machine is a: Practice
Correct answer: (A)
Sale of a fixed asset is a capital receipt.
Sale of a fixed asset is a capital receipt.
Q6. Money from the sale of goods is a: Practice
Correct answer: (C)
Normal trading income.
Normal trading income.
Q7. Revenue expenditure is shown in the: Practice
Correct answer: (D)
It is matched against the current year's revenue.
It is matched against the current year's revenue.
Q8. Goods worth ₹50 lakh bought for resale are: Practice
Correct answer: (B)
Purpose, not size, decides; goods for resale are revenue.
Purpose, not size, decides; goods for resale are revenue.
Q9. Stamp duty and registration fee paid on buying land are: Practice
Correct answer: (B)
They are added to the cost of land.
They are added to the cost of land.
Q10. Profit on selling a fixed asset above book value is a: Practice
Correct answer: (C)
It does not arise from normal trading.
It does not arise from normal trading.
Q11. Loss of a building by fire is a: Practice
Correct answer: (D)
An abnormal loss related to a fixed asset.
An abnormal loss related to a fixed asset.
Q12. Bad debts written off are a: Practice
Correct answer: (A)
A normal trading loss shown in P&L.
A normal trading loss shown in P&L.
Q13. A feature of capital expenditure is that it is: Practice
Correct answer: (D)
It creates a fixed asset.
It creates a fixed asset.
Q14. A bank loan taken for the business is a: Practice
Correct answer: (A)
It creates a liability, not income.
It creates a liability, not income.
Q15. Treating capital expenditure as revenue: Practice
Correct answer: (B)
The whole amount was charged in one year.
The whole amount was charged in one year.
Q16. A modification that increases a machine's production capacity is: Practice
Correct answer: (C)
Earning capacity increases.
Earning capacity increases.
Q17. Salaries of employees are: Practice
Correct answer: (C)
A recurring running cost.
A recurring running cost.
Q18. Premium received on issue of shares is a: Practice
Correct answer: (D)
It goes to Securities Premium A/c, not to P&L.
It goes to Securities Premium A/c, not to P&L.
Q19. The unwritten-off part of deferred revenue expenditure appears in the balance sheet as a: Practice
Correct answer: (A)
It has no realisable value.
It has no realisable value.
Q20. Carriage inward on goods is: Practice
Correct answer: (B)
It is debited to the Trading A/c.
It is debited to the Trading A/c.