Q.Fill in the blank: Capital is reduced by ________. (Profit / Drawings)
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Accounting Terminology Distinction: Capital vs Revenue Expenditure
Let me start with something you already understand from daily life.
When you buy a chocolate, you eat it — it's gone. But when you buy a bicycle, you use it for years. In accounting, these two kinds of spending are treated completely differently. That distinction is the foundation of everything else.
The Core Idea
Revenue Expenditure is spending that gives benefit only in the current accounting period. Think of it as "consumed today" — salaries, rent, raw materials, repairs. You match it against the revenue of the same year.
Capital Expenditure is spending that gives benefit over multiple years. Think of it as "acquiring an asset" — buying machinery, building a factory, buying a patent. The benefit stretches into future periods.
The single question that decides the classification: Does this spending improve the earning capacity of the business for more than one year? If yes → Capital. If no → Revenue.
Why This Distinction Matters
Get this wrong and your profit figure is nonsense.
If you treat a ₹5,00,000 machine purchase as revenue expenditure, you'll show a massive loss in Year 1 and then artificially high profits in Years 2–5 (because the machine is still working but you've already written it off). The balance sheet will also be wrong — it won't show the asset you actually own.
The Income Statement and Balance Sheet must both be correct. This distinction is what keeps them honest.
Accounting Treatment
Revenue Expenditure
| Account Debited | Account Credited |
|---|---|
| Respective Expense Account (e.g., Salaries A/c, Repairs A/c) | Cash/Bank A/c or Creditor A/c |
It goes directly to the Profit & Loss Account (debit side) in the same year.
Capital Expenditure
| Account Debited | Account Credited |
|---|---|
| Respective Asset Account (e.g., Machinery A/c, Building A/c) | Cash/Bank A/c or Creditor A/c |
It appears on the Balance Sheet as a non-current asset. Then, each year, a portion is charged as depreciation (which is revenue expenditure).
The Tricky Cases: Where Students Slip
1. Repairs vs Improvements
Replacing a broken window pane? Revenue — it restores the asset to working condition.
Installing a new, more efficient engine in an old machine? Capital — it increases the machine's future earning capacity.
The word "repair" does not automatically mean revenue expenditure. If the repair adds value or extends useful life, it's capital.
2. Installation Costs
You buy a machine for ₹2,00,000. You pay ₹10,000 to transport it and ₹5,000 to install it. Total capital expenditure? ₹2,15,000. All costs needed to bring the asset to its working condition are capital.
3. Legal Fees
Legal fees to buy a property? Capital — it's part of the cost of acquiring the asset.
Legal fees to defend a trademark in court? Revenue — it's an expense of running the business.
A Quick Reference Table
| Item | Classification | Reason |
|---|---|---|
| Purchase of machinery | Capital | Benefit over many years |
| Wages paid to workers | Revenue | Benefit consumed in current period |
| Cost of acquiring a patent | Capital | Intangible asset with multi-year benefit |
Capital is increased by profit and fresh capital and reduced by drawings and losses. …
Answer: Drawings.
Capital is the owner's investment in the business. It increases with profit and additional capital, and decreases with losses and drawings (cash or goods taken by the …
- CBSE 2026Set MARCH1 markMCQQ.Amount spent for earning revenue is :(a) Profit(b) Expense(c) Income(d) Loss
›Reveal solutionSolution
The amount spent for earning revenue is an Expense — option (b).
This is a basic Kerala Plus One (DHSE) Accountancy terminology question. Let us look at each term:
Term Meaning Profit Excess of revenue over expenses (a result) Expense Cost incurred / amount spent to earn revenue Income Money earned (revenue), the inflow Loss Excess of expenses over revenue (a result) … - CBSE 2025Set ANNUAL1 markQ.State whether True or False: Capital is a liability of Business.
›Reveal solutionSolution
The statement is True.
Under the business entity concept, the business is separate from its owner. The capital the owner invests is therefore a liability of the business towards …
- CBSE 2023Set MARCH1 markMCQQ.Amount invested by the owner in the business is called ________ .(a) drawings(b) investment(c) capital(d) asset
›Reveal solutionSolution
The amount the owner puts into the business is capital — option (c).
This is a basic terminology item from the Kerala Plus One (DHSE) Accountancy syllabus, chapter Introduction to Accounting.
- Capital = funds contributed by the owner. It is a liability of the business towards the owner (the business is treated as separate from the owner under the business-entity concept), so it appears on the liabilities/capital side.
- Drawings = cash or goods withdrawn by the owner for personal use; it reduces capital. …
- CBSE 2021Set MARCH1 markMCQQ.Cash or other assets invested by the owner in the business is ______.(a) Fixed Asset(b) Capital(c) Current Asset(d) None of these
›Reveal solutionSolution
Cash or other assets invested by the owner in the business is Capital — option (b).
This is a basic terminology question from the Kerala Plus One (DHSE) Commerce Accountancy syllabus.
- Capital is the amount of money or value of assets that the proprietor invests in the business. As per the business-entity concept, the business is treated as separate from its owner, so this investment becomes the business's liability towards the owner. This is captured in the acc …
- CBSE 2020Set MARCH1 markMCQQ.The person who owes money to the business is known as _____.(a) Debtor(b) Creditor(c) Partner(d) None of these
›Reveal solutionSolution
The person who owes money to the business is a debtor. Correct option: (a).
This is a basic accounting term from the Kerala Plus One (DHSE) Accountancy introduction chapter:
Term Meaning Debtor A person who owes money to the business (a receivable) Creditor A person to whom the business owes money (a payable) - CBSE 2020Set ANNUAL1 markQ.Fill in the blank: Capital is reduced by ________. (Profit / Drawings)
›Reveal solutionSolution
Answer: Drawings.
Capital is the owner's investment in the business. It increases with profit and additional capital, and decreases with losses and drawings (cash or goods taken by the …
- CBSE 2018Set ANNUAL1 markMCQQ.Those who sell goods on credit are called(a) Creditors.(b) Debtors.(c) Investors.(d) Suppliers.
›Reveal solutionSolution
Those who sell goods to the business on credit are called creditors.
When a business buys goods on credit, the supplier is owed money until payment is made; such suppliers are creditors of the business. Debtors are the opposite — persons who owe money TO the business (to whom goods were sold on credit). 'Investors' provide capital, and ' …
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