Capital And Revenue Expenditure And Receipts (Copy)
Cheat Sheet: 4.1 Capital and Revenue Expenditure and Receipts
O Level and IGCSE Accounting – Quick Revision
Key Definitions
| Term | Definition |
|---|---|
| Capital Expenditure | Money spent to acquire or improve non-current assets (benefits >1 year) |
| Revenue Expenditure | Money spent for day-to-day operations or maintaining assets (short-term) |
| Capital Receipt | Inflows from non-operating sources, e.g. sale of non-current assets |
| Revenue Receipt | Inflows from normal trading activities, e.g. sales, rent received |
Capital vs Revenue Expenditure
| Capital Expenditure | Revenue Expenditure |
|---|---|
| Buying non-current assets (e.g. machinery) | Repairs and maintenance |
| Legal fees on purchase of a building | Insurance of machinery |
| Upgrading equipment to increase capacity | Wages and salaries |
| Delivery and installation costs of new asset | Utility bills (e.g. electricity) |
Capital vs Revenue Receipts
| Capital Receipt | Revenue Receipt |
|---|---|
| Sale of non-current asset (e.g. vehicle) | Sale of inventory (normal business income) |
| Capital introduced by owner | Interest income |
| Bank loan received | Commission received |
Examples Table
| Transaction | Type | Reason |
|---|---|---|
| Purchase of motor van | Capital Expenditure | Asset provides benefit >1 year |
| Annual servicing of motor van | Revenue Expenditure | Maintains working condition, recurring |
| Sale of old machinery | Capital Receipt | Inflow from disposal of fixed asset |
| Sale of goods | Revenue Receipt | Regular trading activity |
Impact of Incorrect Classification
1. If Capital Expenditure is recorded as Revenue Expenditure:
| Effect | Impact |
|---|---|
| Profit | Understated (higher expenses reduce profit) |
| Asset value in balance sheet | Understated (asset not recorded properly) |
2. If Revenue Expenditure is recorded as Capital Expenditure:
| Effect | Impact |
|---|---|
| Profit | Overstated (expenses not deducted) |
| Asset value | Overstated (includes costs that don’t add value) |
Exam Tip:
Always ask – is the benefit of the expense short-term (revenue) or long-term (capital)?