Capital and Revenue Expenditures & Receipts – Summary Notes, Key Differences, Examples & MCQs

Capital and Revenue Expenditures and Receipts: This unit explains the distinction between capital and revenue expenditures and receipts, which is crucial for accurate financial reporting. Capital expenditures provide long-term benefits and are recorded as assets, while revenue expenditures relate to day-to-day operations and are charged to the profit and loss account in the same period.

Similarly, capital receipts arise from non-operational sources like sale of assets or loans, whereas revenue receipts are earned through core business activities like sales and services. Understanding these differences helps in proper classification, impacts final accounts, and ensures compliance with accounting principles like the matching concept.

📘 Capital vs Revenue Expenditure & Receipts – Summary Notes

🎯 Learning Objectives

• Distinguish between capital and revenue expenditure.
• Understand capital vs revenue receipts.
• Recognize their implications in final accounts.

🧾 1. Capital vs Revenue Expenditures

Aspect	Capital Expenditure	Revenue Expenditure
Purpose	Long-term benefit	Immediate/one-period benefit
Accounting Treatment	Shown on Asset side of Balance Sheet	Shown in Profit & Loss Account
Examples	Purchase of machinery, buildings, etc.	Salaries, rent, repairs, etc.
Effect	Enhances earning capacity or reduces future cost	Maintains current earning capacity
Time Period	Benefit for more than one period	Benefit within current period

📝 Matching Principle: Only expenses that help earn revenue in a specific period are charged to that year’s P&L.

🧠 2. Key Considerations for Classification

• Nature of Business: For a furniture dealer, buying furniture is revenue expenditure; for others, it’s capital.
• Recurring Nature: Recurring = revenue; one-time = capital (e.g., rent vs buying a machine).
• Purpose: Maintenance = revenue; enhancement = capital.
• Effect on Revenue: Improves future income = capital.
• Materiality: Small one-time items may be treated as revenue due to immateriality.

💵 3. Capital vs Revenue Receipts

Capital Receipts	Revenue Receipts
Not from regular business ops	From day-to-day operations
Examples: Sale of fixed assets, loans, owner’s investment	Sale of goods/services, interest income
Treatment	Not credited to P&L directly (only profit/loss portion)

✅ 4. Common Examples

Transaction	Capital/Revenue	Reason
Purchase of machinery	Capital	Enduring benefit
Repairs of machinery	Revenue	Maintenance
Renovation increasing cabins from 10 to 13	Capital	Enhances income potential
License to start cinema	Capital	Needed to start operations
Legal fees to defend asset ownership	Revenue	Maintenance of rights
Replacement of worn-out parts	Revenue	Regular upkeep
Repainting of furniture before use	Capital	Makes asset usable
Interest received on FD	Revenue	Regular income
Sale of fixed asset	Capital Receipt	Not part of normal operations
Compensation for voluntary retirement	Revenue	Recurring HR cost

🧪 Test Questions Practice

True/False (with answers):

1. The nature of business is not important – ❌ False
2. Major repairs increasing capacity are revenue – ❌ False
3. Legal fees to defend factory site = capital – ❌ False
4. Replacing machine parts = capital – ❌ False
5. Legal fees to acquire property = ✅ True
6. Construction of temporary huts for cinema = ✅ True

MCQs (with answers):

1. Director’s travel abroad to buy capital asset → (a) Capital
2. Legal fee to defend asset → (b) Revenue
3. Club entrance fee → (a) Capital receipt
4. Govt subsidy for working capital → (b) Revenue receipt
5. Insurance claim on damaged machinery → (a) Capital receipt
6. Interest on investments → (b) Revenue receipt
7. Loan from IDBI for working capital → (c) Capital receipt
8. Revenue from sales is recorded when → (a) Sale is made
9. Repairs ₹25K + Whitewash ₹5K = Revenue; rest capital → (c) ₹30K

FAQs on Capital and Revenue Expenditures and Receipts

1. What is capital expenditure?
   Capital expenditure is spending on assets or improvements that provide benefits over multiple accounting periods.
2. What is revenue expenditure?
   Revenue expenditure is incurred for day-to-day operations and provides benefit only in the current accounting period.
3. How is capital expenditure shown in financial statements?
   It is recorded as an asset on the balance sheet.
4. How is revenue expenditure shown in financial statements?
   It is recorded in the profit and loss account as an expense.
5. What is the main difference between capital and revenue expenditure?
   The time period of benefit: capital is long-term; revenue is short-term.
6. What is a capital receipt?
   A capital receipt is money received from non-operational activities like loans, sale of assets, or share capital.
7. What is a revenue receipt?
   Revenue receipts are earnings from regular business activities like sales or service income.
8. Are all expenses for purchasing assets capital in nature?
   Yes, if the asset provides long-term benefits or is used in operations.
9. Is repair expense capital or revenue?
   Regular repairs = revenue; major repairs enhancing capacity = capital.
10. Is purchase of inventory a capital expenditure?
    No, inventory is meant for resale, so it’s a revenue expenditure.
11. Is installation cost of a machine capitalized?
    Yes, it’s added to the machine’s cost as it is necessary to bring the asset into working condition.
12. What are examples of capital expenditures?
    Purchase of land, building, plant & machinery, legal fees for acquiring property.
13. What are examples of revenue expenditures?
    Salaries, rent, maintenance, recurring repairs, utility bills.
14. How do you treat legal fees for acquiring property?
    It’s capital expenditure as it’s necessary for acquiring the asset.
15. How do you treat legal fees to defend asset ownership?
    It’s revenue expenditure – it’s maintenance of existing rights.
16. Are expenses for obtaining a business license capital?
    Yes, they are considered pre-operative capital expenditures.
17. Is the cost of temporary huts for construction capital?
    Yes, if necessary for construction, it is added to the asset’s cost.
18. What is the matching principle in accounting?
    Expenses are recorded in the same period as the revenues they help generate.
19. How do capital receipts affect profit and loss accounts?
    They don’t directly affect P&L; only gains/losses from disposal are reflected.
20. Is the amount received from selling an asset revenue or capital?
    Capital receipt; profit or loss on sale goes to P&L.
21. What is the treatment for insurance claims on machinery loss?
    It is considered a capital receipt.
22. How are prepaid expenses classified?
    As assets in the balance sheet since the benefit will be received in the future.
23. Is interest on investment a capital or revenue receipt?
    Revenue receipt as it arises from regular income.
24. How do you treat compensation paid for voluntary retirement?
    It’s revenue expenditure, though it may be amortized over years due to its magnitude.
25. Does the nature of business affect classification?
    Yes. For example, furniture is a capital asset for a grocery store, but inventory for a furniture seller.
26. What is an example of capital receipt other than sale of assets?
    Loan from a bank or capital introduced by owners.
27. Are expenses to increase fuel efficiency capital?
    Yes, if they result in long-term cost savings.
28. Is repainting second-hand furniture a capital expense?
    Yes, if it’s needed to make the asset usable.
29. What is the treatment for MCQs and test questions in exams?
    Focus on scenario-based logic: consider purpose, benefit duration, and nature of the item.
30. Why is correct classification of expenses important?
    To ensure accurate financial statements and comply with accounting principles.

A clear understanding of capital and revenue expenditures and receipts is essential for accurate financial reporting and decision-making. Proper classification helps in presenting a true and fair view of an organization’s financial position, ensures compliance with accounting principles like the matching concept, and prevents misstatement of profits.

By analyzing the purpose, frequency, benefit duration, and nature of transactions, accountants can determine the correct treatment—either in the profit and loss account or the balance sheet—thereby maintaining the integrity of the financial statements.