Q.Costs incurred by a business in the process of earning revenue are called as ________.
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Capital vs Revenue Expenditure
Think about your own pocket money. If you buy a new phone, that's a big purchase you'll use for years — it's like an investment. If you buy a pack of chips, it's gone in five minutes. That's the everyday intuition: some spending builds something lasting, other spending just keeps things running.
In Accountancy, this distinction is the Capital vs Revenue Expenditure divide. It's one of the most fundamental ideas you'll use, because it decides whether a cost appears on the Balance Sheet (as an asset) or in the Profit & Loss Account (as an expense). Get it wrong, and your profit figure is wrong — and so is your Balance Sheet.
The Precise Meaning
Capital Expenditure is spending that gives a long-term benefit — typically more than one accounting year. It either:
- Acquires a fixed asset (buying a machine, land, building)
- Adds to the earning capacity of an existing asset (installing a new engine in an old truck)
- Brings a new asset into working condition (installation charges, freight on a new machine)
Revenue Expenditure is spending that gives a short-term benefit — usually consumed within the current accounting year. It maintains the existing earning capacity without increasing it. Examples: salaries, rent, repairs, electricity, raw materials.
The core test: Does this expenditure increase the earning capacity or extend the useful life of an asset? If yes → Capital. If it merely maintains the current capacity → Revenue.
Why It Matters
Profit is calculated as Revenue minus Expenses. If you treat a capital expense (say, ₹50,000 for a new machine) as a revenue expense, you'll understate profit by ₹50,000 in Year 1 — and overstate it in later years because the asset never appears on the Balance Sheet. The reverse mistake inflates profit in Year 1 and understates it later.
The Income Tax department and auditors check this distinction very carefully. A company that deliberately misclassifies is committing fraud.
Accounting Treatment
| Nature | Debit | Credit | Where it appears |
|---|---|---|---|
| Capital Expenditure | Asset Account (e.g., Machinery A/c) | Cash/Bank or Creditor | Balance Sheet (as a fixed asset) |
| Revenue Expenditure | Expense Account (e.g., Repairs A/c) | Cash/Bank or Creditor | Profit & Loss Account (as an expense) |
Example: A company buys a delivery van for ₹4,00,000 and pays ₹10,000 for registration and ₹5,000 for a new paint job.
- Van cost ₹4,00,000 + registration ₹10,000 = ₹4,10,000 Capital Expenditure (debit Vehicle A/c, credit Bank)
- Paint job ₹5,000 = Revenue Expenditure (debit Repairs & Maintenance A/c, credit Bank)
Why? Registration is necessary to bring the van into use — it's part of the asset cost. The paint job is routine maintenance.
The Deferred Revenue Expenditure Exception
There's a hybrid: Deferred Revenue Expenditure. This is a large revenue expense whose benefit extends beyond one year (e.g., a massive advertising campaign for a new product launch). It is treated as an asset initially and written off over 3–5 years.
| Year | Treatment |
|---|---|
| Year of incurrence | Debit Deferred Revenue Expenditure A/c (shown as a fictitious asset on Balance Sheet) |
The costs a business incurs in the day-to-day process of earning its revenue (rent, salaries, purchases, wages, etc.) are its expenses; they are matched against revenue to find profit. Capital, assets and capital …
Costs incurred by a business in the process of earning revenue are called Expenses — option (b). This is a basic accounting-terminology question in the Kerala Plus One (DHSE) Accountancy syllabus.
An expense is the value of resources used up (or costs incurred) during an accounting period to earn revenue — for example wages, salaries, rent, carriage, cost of goods sold and depreciation. Under the matching principle, expenses of a period are set against the revenue of that same period to arrive at profit.
Why the other options are wrong:
- (a) Capital Expenditure — money spent to acquire or improve a fixed asset whose benefit lasts several years (e.g. buying machinery); it is not a cost of earning current revenue. …
Showing the 12 most recent of 17 on this concept.
- CBSE 2025Set ANNUAL1 markQ.State whether True or False: Huge Advertisement expenses on introduction of a product is a capital expenses.
›Reveal solutionSolution
The statement is True.
A large sum spent on advertising to launch a new product gives benefit over several years, not just the current year. Such expenditure is treated as a capital (deferred revenue) …
- CBSE 2025Set ANNUAL1 markQ.State whether True or False: Expenses paid on installation of a new machine is a revenue expenses.
›Reveal solutionSolution
The statement is False.
Expenses incurred to install a new machine and make it ready for use are added to the cost of the machine - they are capital expenditure, …
- CBSE 2024Set MARCH1 markMCQQ.Expenses incurred to maintain fixed asset is ________ .(a) Capital expenditure(b) Revenue expenditure(c) Deferred Revenue expenditure(d) General expenditure
›Reveal solutionSolution
Expenses incurred to maintain a fixed asset are Revenue expenditure. Correct option: (b) Revenue expenditure.
Revenue expenditure is expenditure whose benefit is exhausted within the current accounting year and which does not increase the earning capacity of a fixed asset — it merely maintains the asset in its existing condition. Ordinary repairs, servicing, oiling and routine maintenance of machinery are revenue expenditure and are debited to the Profit and Loss Account.
…
- CBSE 2024Set MARCH1 markQ.Give any one example for capital expenditure.
›Reveal solutionSolution
Capital expenditure example: purchase of machinery (a fixed asset giving long-term benefit).
Capital expenditure is spending that gives a benefit extending over more than one accounting year, generally by acquiring or improving a fixed asset. Examples include the purchase of machinery, building or furniture, and expenses like installation charges added t …
- CBSE 2024Set ANNUAL1 markQ.Fill in the blank: An expenditure incurred on white washing a new factory building is a ______ expenditure.
›Reveal solutionSolution
White-washing a new building is a capital expenditure.
Expenditure incurred to bring a new fixed asset into working condition is part of the cost of the asset and is capital expenditure.
- For a new factory building, the first white-washing is a cost of making it fit for use, so it is capitalised (capital expenditure). …
- CBSE 2023Set ANNUAL1 markMCQQ.Heavy advertisement expenditure is an example of(a) revenue expenditure(b) capital expenditure(c) deferred revenue expenditure(d) capital loss
›Reveal solutionSolution
Heavy advertisement expenditure is a deferred revenue expenditure.
- Revenue expenditure benefits only the current year.
- Capital expenditure creates a long-term asset. …
- CBSE 2023Set ANNUAL1 markQ.Correct the underlined portion of the following sentence: 'Installation charges of a new machinery is a revenue expenditure.' (underlined word: revenue)
›Reveal solutionSolution
Installation charges of new machinery are capital expenditure, not revenue.
Any cost incurred to bring a fixed asset into working condition — carriage, installation, erection, trial-run charges — is added to the cost of the asset and capitalised, because the benefit lasts over the asset's whole life. Hence it is **capital exp …
- CBSE 2023Set ANNUAL1 markQ.Correct the underlined portion of the following sentence: 'Annual repair to an existing building is a capital expenditure.' (underlined word: capital)
›Reveal solutionSolution
Annual repair to an existing building is revenue expenditure, not capital.
Expenditure that merely maintains an existing asset in its present condition, with benefit confined to the current year, is revenue expenditure. Only an outlay that increases the capacity or life of the asset would be capital. Ordinary annual repa …
- CBSE 2022Set MARCH1 markMCQQ.Costs incurred by a business in the process of earning revenue are called as ________.(a) Capital Expenditure(b) Expenses(c) Capital(d) Assets
›Reveal solutionSolution
Costs incurred by a business in the process of earning revenue are called Expenses — option (b). This is a basic accounting-terminology question in the Kerala Plus One (DHSE) Accountancy syllabus.
An expense is the value of resources used up (or costs incurred) during an accounting period to earn revenue — for example wages, salaries, rent, carriage, cost of goods sold and depreciation. Under the matching principle, expenses of a period are set against the revenue of that same period to arrive at profit.
Why the other options are wrong:
- (a) Capital Expenditure — money spent to acquire or improve a fixed asset whose benefit lasts several years (e.g. buying machinery); it is not a cost of earning current revenue. …
- CBSE 2022Set ANNUAL1 markMCQQ.Transportation cost on purchase of a new machinery is a(a) revenue expenditure(b) capital expenditure(c) deferred revenue expenditure(d) recurring expenditure
›Reveal solutionSolution
Transport cost of a new machine is a cost of acquisition and is capitalised, so it is capital expenditure.
- Any expense incurred to acquire a fixed asset and bring it to working condition/location (freight, installation, carriage) is added to the asset's cost.
- Such expenditure benefits the business for many years, so it is capital expenditure, not a running (revenue) expense. …
- CBSE 2022Set ANNUAL1 markMCQQ.Expenditure incurred on advertising goods is(a) capital expenditure(b) revenue expenditure(c) capital loss(d) revenue loss
›Reveal solutionSolution
Routine advertising of goods is a short-term selling expense, so it is revenue expenditure.
- Advertising goods to promote current sales benefits the business within the year, so it is a running cost.
- It is revenue expenditure, debited to the Profit & Loss Account. …
- CBSE 2022Set ANNUAL1 markQ.What is deferred revenue expenditure? Or Write down two names of internal users of accounting information.
›Reveal solutionSolution
Deferred revenue expenditure is revenue in nature but its benefit lasts several years, so it is written off over those years instead of all at once.
Deferred revenue expenditure is an expenditure that is basically revenue in nature but is unusually heavy and its benefit is expected to be received over more than one accounting period. Hence it is not charged wholly to the Profit & Loss Account of one year; instead it is written off in instalments over a few years, and the portion not yet written off is carried forward in the Balance Sheet (a fictitious asset). A common example is a large advertising campaign for launching a new product.
Or — Two names of internal users of accounting information: …
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