Capital & Revenue Items
— Accounting · Expenditure & Receipts —
Big idea: Expenditure = money going out of the business. Receipt = money coming in. Each comes in two types: capital (one-off, long-term, goes to the SOFP / balance sheet) and revenue (day-to-day, goes to the income statement).
1. The Big Picture
Whenever there is any spending in the business it is called expenditure (an outflow). Money coming in is a receipt (an inflow). Both are split into capital and revenue.
Words: Fixed asset = Non-current asset (NCA) — an asset with more than 1 year of life and a permanent nature: building, machinery, computers, equipment, motor vehicles, furniture. | SOFP = Statement of Financial Position = balance sheet.
2. Capital Expenditure
Definition: Capital expenditure is incurred when a business spends money either to buy a fixed (non-current) asset or to add to the value of an existing fixed asset.
What counts as capital expenditure
- Buying a non-current asset — building, machinery, computers, equipment, motor vehicle.
- Upgrading / modifying an existing NCA so its value or performance goes up or its running cost goes down.
- Any cost needed to bring the asset to its present location and condition — ready for its intended use.
- It is non-recurring: a one-off, maybe once a year or even less often — not a day-to-day cost.
Capital expenditure = cost of buying the asset + every cost needed to get it ready for use
Board list — spending to include: acquiring fixed assets | bringing them into the business | legal costs of buying buildings | carriage inwards on machinery bought | any other cost needed to get a fixed asset ready for use.
Example — buying an air conditioner
The A/C is useless until it is installed and operational, so the transport, installation and testing are all part of its cost. Same for a building: the legal cost of contracts needed to buy it is capital too.
Upgrades that make an asset better = capital:
- CNG kit in a car — petrol use falls, gas is cheaper ⇒ running cost reduced.
- PC upgrade — extra RAM or a bigger hard drive (more GB).
- Turbo engine, HID lights, new sound system, alarm system on a vehicle.
- Extension built onto a warehouse (board example).
Note: capital expenditure is not technically an expense — it is recorded as a non-current asset in the SOFP, not charged in the income statement (the asset is expensed slowly later through depreciation).
More capital items from the board
- Acquiring fixed assets and, in some cases, intangible assets
- Repairing an existing asset so as to improve its useful life
- Upgrading an existing asset if it gives superior performance
- Preparing an asset to be used in the business
- Restoring property or adapting it to a new / different use
- Starting or acquiring a new business
- Paint on a new building
- Headlights on a vehicle for better visibility
- Training cost (listed as capital on the board)
- Any legal cost to acquire non-current assets
Careful: in many textbooks training is treated as a revenue expense. Follow what your teacher / syllabus says — the board here lists it under capital.
3. Revenue Expenditure
Definition: Revenue expenditure is not spent on increasing the value of fixed assets, but on running the business on a day-to-day basis or maintaining an existing asset's operating capacity.
- "Day-to-day" does not mean literally every day — it can be daily, weekly, monthly… it is recurring.
- Charged as an expense in the income statement (unlike capital expenditure, which sits in the SOFP).
- Temporary in nature — used up within one accounting period.
- Depreciation of a non-current asset is also revenue expenditure.
Examples of revenue expenditure
| Running the business | Maintaining an asset |
|---|---|
| Salaries & wages | Servicing / tuning a car |
| Heat & lighting (electricity, water) | Repair & maintenance |
| Rent & rates (factory / office) | Oil, air-filter, fuel-filter change |
| Insurance · Sundry expenses | Polishing the car |
| Depreciation of NCA | Paint on an old building |
Remember: Capital increases the value of the NCA. Revenue only maintains it.
e.g. fuel for the van does not make the van worth more — it only runs the van ⇒ revenue.
Same item, different purpose: a van bought to use in the business = capital. But a van showroom / garage buys vans to resell — for them it is stock, a revenue item, because buying vans is their day-to-day trade.
4. Capital vs Revenue — How to Decide
The three rules (board)
- Expenditure directly incurred in bringing a fixed asset into use for the first time ⇒ capital.
- Expenditure that improves a fixed asset — makes it superior to when first owned (e.g. building an extension to a warehouse) ⇒ capital.
- All other expenditure ⇒ revenue.
| Capital expenditure | Revenue expenditure | |
|---|---|---|
| Purpose | buy / upgrade NCA, bring it to use | run business, maintain NCA |
| Frequency | non-recurring, one-off | recurring, day-to-day |
| Effect on NCA | increases value / cuts running cost | maintains value only |
| Benefit lasts | more than 1 year (permanent) | 1 accounting period (temporary) |
| Recorded in | SOFP (as non-current asset) | Income statement (as expense) |
Classify these — board table
| # | Expenditure | Type | Why |
|---|---|---|---|
| 1 | Buying van | Capital | NCA, used for years |
| 2 | Petrol for van | Revenue | used up quickly; value of van unchanged |
| 3 | Repairs to van | Revenue | maintains, does not increase value |
| 4 | Extra headlights on van | Capital | improvement — adds something |
| 5 | Buying machinery | Capital | NCA |
| 6 | Electricity of using machinery | Revenue | just runs the machine |
| 7 | $1,500 on machinery: $1,000 improvement + $500 repairs | Capital $1,000 / Revenue $500 | split the bill |
| 8 | Painting outside of new building | Capital | first-time cost to get it ready |
| 9 | 3 years later — repainting the building in (8) | Revenue | maintenance |
Mixed bill — item 7 worked out
Total spent = $1,500
Improvement (upgrade) $1,000 ⇒ added to machinery in SOFP
Repairs $500 ⇒ expense in income statement
1,000 + 500 = $1,500 ✓
Painting a house (teacher's example):
Building the house and painting it the first time = capital (one-time cost). Repainting after 2–3 years = revenue (maintenance).5. Incorrect Treatment of Expenditure
If capital expenditure is wrongly treated as revenue, or revenue expenditure is wrongly treated as capital, then both the balance sheet (SOFP) and the income statement (trading & P&L) are wrong. So net profit is wrong too — and if the item belongs in the trading account part, gross profit is also wrong.
Case A — Capital treated as Revenue
e.g. a motor vehicle is bought but booked as motor vehicle expense instead of as a non-current asset.
Case B — Revenue treated as Capital
e.g. fuel put in the vehicle is added to the motor vehicle (asset) account instead of motor expenses.
| Error | Profit | NCA in SOFP |
|---|---|---|
| Capital → treated as Revenue | understated | understated |
| Revenue → treated as Capital | overstated | overstated |
Trick: profit and NCA always move in the same direction — both ↓ or both ↑.
Prudence concept: assets and profits must never be overstated. Case B (fuel counted as an asset) breaks prudence — the asset is inflated, the expense is undercharged, so profit is inflated.
Note: at the end of the first video the teacher says "understated" for Case B by a slip of the tongue. The board (and his explanation just before) says overstated — that is the correct answer.
Illustration (my numbers): $200 of fuel booked to the vehicle account
Fuel should be an expense of $200
Expenses charged = $0 ⇒ expenses too low by 200
Profit overstated by $200
Vehicle (NCA) overstated by $200
6. Capital & Revenue Receipts
Expenditure was the outflow; receipts are the inflows. Again two types.
Capital receipts
Definition: inflows that are non-routine / non-recurring and not part of the day-to-day activities. We don't expect this money every day, week or month. They are recorded in the SOFP.
Board definition: a capital receipt comes from the sale (or purchase) of capital assets such as plant & machinery, furniture, long-term investments — which shall not be occurring all the time.
Sources of capital receipts:
- Sale of fixed assets (tangible or intangible) — old vehicles, machinery, furniture, a building no longer used. Also a payment from an insurance claim for a damaged fixed asset.
- Capital invested by the owner (sole trader puts in more money).
- Issue of shares (a company raising finance).
- Loan from the bank / issue of a debt instrument.
Why "rare"? We don't want to sell our assets — they are useful in the business — so such sales are not routine.
Revenue receipts
Definition: inflows of routine, recurring nature — part of the day-to-day activities. They are recorded in the income statement (sales and other revenue items are added to gross profit).
- Sale of goods & services to customers (selling stock)
- Fees — a school's student fees come in every month
- Rent received from a tenant, commission received
- Discount received (e.g. for paying suppliers early)
Same asset, different business: A textile company selling clothes = revenue receipt (its day-to-day trade). The same company selling its old furniture = capital receipt. A furniture shop selling furniture = revenue receipt.
Example — selling a van (board)
7. Comparison & Cheat-Sheet
| Capital receipt | Revenue receipt | |
|---|---|---|
| Nature | non-routine, one-off | routine, recurring |
| Part of day-to-day? | No | Yes |
| Recorded in | SOFP | Income statement |
| Examples | owner's capital, shares issued, bank loan, sale of NCA, insurance claim on damaged NCA | sales of goods/services, fees, rent received, commission received, discount received |
✓ Full Chapter Cheat-Sheet
- Capital expenditure: buy NCA | upgrade / modify (↑ performance or ↓ running cost) | any cost to bring it to its intended use (carriage inwards, legal, installation, testing) ⇒ SOFP, non-recurring.
- Revenue expenditure: day-to-day running (rent, wages, electricity, insurance) | maintenance / repairs | depreciation ⇒ income statement, recurring.
- Rules: 1st-time use ⇒ capital · improves the asset ⇒ capital · everything else ⇒ revenue.
- Capital → treated as revenue: profit ↓ understated, NCA ↓ understated.
- Revenue → treated as capital: profit ↑ overstated, NCA ↑ overstated (breaks prudence).
- Capital receipts: owner's capital, loan, shares, sale of NCA, insurance claim on NCA ⇒ non-routine ⇒ SOFP.
- Revenue receipts: sales of goods & services, fees, rent / commission / discount received ⇒ routine ⇒ income statement.
- Van test: buy van (use) = capital · petrol, repairs = revenue · extra headlights = capital · van for resale = revenue.