Capital and Revenue Expenditure Before preparing the financial statements of business organisation’s, we should get information about capital and income expenses and capital and income receipts, because having a clear knowledge of these helps in preparing the income statement and balance sheet. At the end of the financial year, Final Accounts are prepared by every business, in which Trading and Profit & Loss Account and Balance Sheet are included. Items given in the trial balance are entered either in the trading and profit and loss account or in the balance sheet. For this, it is very important to divide the items given in the trial balance into income and capital, because all the income items given in the balance sheet ie income expenditure and income receipts are written in the business and profit and loss account, while all the capital expenditure and capital receipts are written in the balance sheet. (Position Details) are written in. Therefore, before preparing the final accounts, it is very necessary to divide the items of trial balance into capital and income. Due to wrong classification of any item into capital and income, the amount of profit or loss reported by the profit and loss account will be wrong and the balance sheet will also not give the correct and proper financial position as on that date. Classification of Expenditure Expenses can be divided into three categories : Expenditure 1. Capital Expenditure 2. Revenue Expenditure 3. Deferred Revenue Expenditure

1. Capital and Revenue Expenditure
Capital and Revenue Expenditure
Before preparing the financial statements of business organisation’s, we should get
information about capital and income expenses and capital and income receipts, because
having a clear knowledge of these helps in preparing the income statement and balance
sheet.
At the end of the financial year, Final Accounts are prepared by every business, in which
Trading and Profit & Loss Account and Balance Sheet are included. Items given in the trial
balance are entered either in the trading and profit and loss account or in the balance sheet.
For this, it is very important to divide the items given in the trial balance into income and
capital, because all the income items given in the balance sheet ie income expenditure and
income receipts are written in the business and profit and loss account, while all the capital
expenditure and capital receipts are written in the balance sheet. (Position Details) are
written in.
Therefore, before preparing the final accounts, it is very necessary to divide the items of trial
balance into capital and income. Due to wrong classification of any item into capital and
income, the amount of profit or loss reported by the profit and loss account will be wrong and
the balance sheet will also not give the correct and proper financial position as on that date.
Classification of Expenditure
Expenses can be divided into three categories :
Expenditure
1. Capital Expenditure
2. Revenue Expenditure
3. Deferred Revenue Expenditure

2. 1. Capital Expenditure — Meaning- Such expenditure, the benefit of which is not received
in a single year but will continue to be received for many years in the future, is called capital
expenditure.
In this, all such expenses are included, which are incurred in acquiring any such permanent
asset, such as the expenditure incurred on the purchase of building, plant, furniture etc. is
capital expenditure. These assets are not purchased for resale in the business but are
purchased for the operation of the business. Such expenses are generally non-recurring.
The major items of capital expenditure are as follows:
(1) An Expenditure which results in the acquisition of a permanent
(2) Expenditure in connection with the purchases, receipt or erection of a fixed asset
(3) An Expenditure for an extension to or improvement in a fixed asset which improves the
profit – earning capital for the Business
(4) An expenditure incurred to acquire the right to carry on the Business
(5) An Expenditure incurred in setting the profit – earning machinery in motion
•• Benefits — The benefit of capital expenditure is not limited to one year only. Its benefits
would be reaped for many years in the future.
•• Accounting treatment —
(1) The respective accounts are debited for capital expenditure.
( 2) Capital expenditure is shown on the assets side of the balance sheet.
An expenditure cannot be called capital merely because a huge amount has been spent or
lump sum payment has been made or out of proceeds of sale of a fixed asset. Capital
expenditure is shown on the Assets Side of the Balance Sheet.
Example of capital expenditure
(1) Cost of Land and Building
(2) plant, Machinery, furniture etc.
(3) Motor – Car, Truck etc.
(4) Installation Expenses
(5) Expenditure on Installation Expenses
(6) Amount paid for Goodwill

3. (7) Payment, trademarks, patents, copyrights etc.
Test, Criteria or Characteristics of Capital expenditure
1. Cost of fixed assets or expenditure relating to extension/improvement of the property.
2. Expenses in the nature of profit to be received till the end.
3. Expenses to reduce business operating expenses or increase income potential.
4. Expenses generally of non-recurring nature.
5. Direct expenditure related to purchase, establishment, expansion etc.
6. Expenditure related to new property in place of old property.
7. Expenses preceding the incorporation of the company.
2. Revenue Expenditure — Meaning – All such expenses which are incurred for the normal
operation and management of the business or for the preservation and maintenance of the
fixed assets of the business, are revenue expenses. Such expenditure whose benefit is
received in the same accounting period, apart from this, if any expenditure does not increase
the earning capacity of the business or the fixed assets, then it is also an income
expenditure.
•• Benefits — The benefit of revenue expenditure is received only in one accounting year.
Thus the utility of revenue expenditure is short term.
•• Accounting Treatment — Revenue expenses are debited to trading account or profit and
loss account. Example – Expenses incurred for the fulfillment of the following purposes are
revenue expenditure
(1) (Expenses incurred in the day-to-day running of the business); Such as wages, salaries,
rent, electricity expenses, management and administration expenses, financial expenses,
selling and distribution expenses, etc.
(2) (Expenses incurred in maintaining the fixed assets in a state of working efficiency).
(3) (Expenses incurred in purchases of current assets) – The purchase related expenditure
of the goods which are bought for resale at profit is called revenue expenditure.
(4) (Others) – Depreciation on fixed assets, interest on loan, loss on sale of assets, annual
fee for renewal of patent, etc.

4. (1) Revenue expenditure is shown on the debit side of Trading and Profit & Loss
Account, and
(2) Capital expenditure is shown on the asset side of the Balance Sheet.
Test, Criteria or characteristics of revenue Expenditure
1. Revenue expenditure is recurring in nature.
2. Expenses which are in the nature of maintaining income are revenue expenditure.
3. Expenditure whose utility (benefit) is only for one accounting year.
4. Nature of business – Expenses incurred on the purchase of a car by a car dealer or on the
purchase of a machine by a machine dealer are of revenue nature.
Difference between Capital and Revenue Expenditure
Following are the major differences between capital and revenue expenditure:
(1) Acquisition of Fixed Asset Vs. Routine Experience — Expenditure incurred on the
purchase, improvement or expansion of a fixed asset is called capital expenditure, while the
maintenance, repair and general expenses of the business are called revenue expenditure.
(2) Non – recurring Vs. Recurring Expenditure — Generally non-recurring expenditure is
capital expenditure and recurring expenditure, expenditure that occurs repeatedly, is
generally called revenue expenditure.
(3) Improvement Vs. Maintenance — Capital expenditure is the expenditure incurred to
increase or improve the profit earning capacity of the property, such as installing modern
spare parts in old machines, making additional rooms in the building etc. On the contrary, the
expenditure incurred to maintain the profit earning capacity of the business or on the
maintenance of assets or repair of fixed assets etc. are expenditure.
(4) Expenditure for Collecting Capital — Expenditure incurred for raising capital is called
capital expenditure, such as commission paid for issue of shares, legal expenses etc. are
capital expenditure. In contrast, dividend paid to shareholders is an income expense.
(5) One previous year — Capital expenditure is such that it provides benefits for many
years, while revenue expenditure is consumed in a single previous year.
(6) Sources of Income Vs. Earning of Income — The expenditure which is related to the
receipt of income source is capital expenditure, while the expenditure incurred to earn
income is revenue expenditure. For example, the amount spent on obtaining an agency or
license is a capital expenditure, while the expenditure on the purchase of raw materials is a
revenue expenditure.
The Explanation

5. 1. To decide whether an expenditure is capital expenditure or revenue, it is not necessary to
see whether the payment is made in lump sum or intermittently over time.
2. It is not necessary for an expenditure to be called capital expenditure only when assets
are created
Revenue Expenditure become Capital Expenditure
The following expenses, though being revenue expenditure, become capital in certain
circumstances :
(1) Repairs — Repair expenses are generally income but if we buy an old machine and put
it to use. Some amount is paid as repair expenses, then the amount of such repair is
capitalised by adding it to the cost of the machine.
(2) Wages — It is a revenue expenditure but if the wage expenditure is paid in installing a
new machine in the factory or in the construction of a fixed asset, then it is treated as a
capital expenditure and added to the cost of the asset.
(3) Legal Expenditure — These are revenue expenditure, but if some statutory expenditure
has been incurred while purchasing a fixed asset, then it is considered as capital
expenditure and added to the cost of the asset.
(4) Transport Expenditure — Such expenses incurred in bringing the plant and machinery
to the factory are considered as capital expenditure.
(5) Interest on Capital — Interest on the capital paid during the construction period of the
factory, building or machine is capital expenditure.
(6) Row Material — The raw material used in the manufacture of a fixed asset is a capital
expenditure.
(7) Brokerage and Commission — Brokerage and commission paid in connection with the
purchase of a fixed asset is a capital expenditure. It is added to the cost of the asset
(8) Development Expenditure — The development of industries like tea, rubber plantation,
colliery etc. takes time. Therefore, the expenditure incurred during the period of their
development is considered as capital expenditure. When they are fully developed, then the
expenditure on their maintenance is considered as income expenditure.
(9) Advertising Expenses — The cost of advertising expenses related to the new product
should be treated as capital expenditure because the benefit of such expenses will be
available in future.
Classify the Following into Capital and Revenue Expenditure with Example
(1). Spent towards additions to machinery in order to double the production ₹ 4,000

6. Capital Expenditure
(2). Incurred for repairs to machinery necessitated by the negligence of the employees
₹ 2,400
Revenue Expenditure
(3). Spent ₹ 1,600 towards replacement of worn out parts of machinery
Revenue Expenditure
(4). Paid for painting the factory permission ₹ 1,000
Revenue Expenditure
Frequently Asked Questions
Qs 1. What are the 3 types of expenditure
Ans. 3 types of expenditure
1. Capital Expenditure
2. Revenue Expenditure
3. Deferred Revenue Expenditure
Qs 2. What is capital and revenue expenditure with examples?
Ans. Qs 1. (1). Spent towards additions to machinery in order to double the production ₹
4,000
Capital Expenditure
Qs 3. capital and revenue expenditure example
Ans. Some example of Capital and Revenue Expenditure
Example of Capital Expenditure — Cost of Land & Building
plant, Machinery, Furniture Miter-Car etc….

7. Example of Revenue Expenditure — wages, salaries, rent, electricity expenses etc….
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