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Capital and Revenue Expenditure and Receipts | O Level Accounting 7707 & IGCSE Accounting 0452 | Detailed Free Notes To Score An A Star (A*)

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Capital Expenditure

  • Any expense that bears the benefit for more than 1 year.
  • Usually, such expenses are those that are one-time or one-off, and they bring a permanent improvement in a long-term asset.
  • It also includes initial expenses to bring a long-term, non-current asset into the business.
  • It also includes initial installation expenses for the non-current assets.
  • For example, installation expense, legal fee, cost to bring the asset to the business premises, upgradation.
  • Paint is not part of capital expense because it has to be completed every now and then.
  • Similarly, regular maintenance is not a capital expense.
  • Capital expenses are added to the cost of the non-current asset

Revenue Expenditure

  • Any expenditure that is recurring in nature and whose benefit is used up in up to one year.
  • Such expenses are included in the operative expenses section.
  • They are usually expenses that are usually occurring in the due course of the business.
  • Regular maintenance is part of revenue expenditure.

Capital Receipts

  • The receipts that generate from financial activities instead of operative activities.
  • Such receipts are occasional and do not occur frequently.
  • They are not from the primary source of income of the businesses.
  • Such receipts will either reduce the business assets
  • Or they will increase the business liabilities.
  • THEY ARE NOT RECORDED IN INCOME STATEMENT
  • They are recorded in balance sheet.
  • Capital Receipts
    • Money that comes in from sale of non-current assets.
    • Loan taken from any financial institution
    • Selling shares of the business and making capital gain.
      • Both common or preferred shares can be a part of this.
  • Bond payments cash.
  • New partner invests money in the business.
  • Selling a long-term asset cash.
  • Issuing a debt instrument

Revenue Receipts

  • They don’t reduce the asset or increase a liability
  • Instead, they are occur frequently
  • They occur from primary activities of the business
  • They are recorded in the profit and loss account/ income statement of the business.
  • Examples
    • Interest earning
    • Rent received
    • Discount received (cash discount)
    • Sales of goods and/ or services
    • Dividend received
    • Waste or scrap material revenue
    • Recovery of bad debts

Incorrect treatment effect

  • If capital receipt is recorded in income statement, it will overstate the profit.
    • It may also overstate asset
    • It may also understate liabilities
  • If revenue receipt is recorded in balance sheet, it will understate profit
    • It may also understate asset
    • It may also overstate liabilities
  • If capital expenditure is recorded in income statement, it will reduce profit
    • It may also reduce asset
    • It may also increase liability
  • If revenue expenditure is recorded in balance sheet, it will increase profit
    • It may also increase asset
    • It may also decrease liability
Hunain Zia

Hunain Zia has previously achieved considerable success in the high-school educational stream, gaining a massive 154 Total A Grades and 7 Major Distinctions, a process in which he broke/ set 11 different world records, including the most A grades ever achieved, most subjects ever appeared in, most distinctions, gaining distinctions across two separate boards (Pearson Edexcel and CAIE) within the same year/ ever, and even 19 hours of constant examination. All records stand intact today. Hunain pursued his Honors Accounting Degree from the prestigious Bentley University, and then completed an LLB (in Honors) from University of London. Currently, he manages multiple social and commercial projects, has founded digital streams and works tirelessly in the education sector.

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