Distinguish between capital and revenue expenditure and state whether the following statements are items of ca

Short Answer Questions · Q5

Q. Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure :

(a) Expenditure incurred on repairs and whitewashing at the time of purchase of an old building in order to make it usable.

(b) Expenditure incurred to provide one more exit in a cinema hall in compliance with a government order.

(a) Registration fees paid at the time of purchase of a building

(b) Expenditure incurred in the maintenance of a tea garden which will produce tea after four years.

(d) The expenditure incurred in erecting a platform on which a machine will be fixed.

(e) Advertising expenditure, the benefits of which will last for four years.

Yanam CbseNCERTSubjective· 3mImportance★★★★★est

70% · 28/40 Questions

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

Concept understanding — Capital vs Revenue Expenditure

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.

Important

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)

Start your 14-day free trial to unlock the full solution →

Capital expenditure is spent to acquire, improve or extend a fixed asset, or to increase its earning capacity; its benefit lasts for more than one year and it is shown in the Balance Sheet. Revenue expenditure is spent to run the business day-to-day and to maintain earning capacity; its benefit is used up within the year and it is charged to the Trading/Profit and Loss Account.

Basis	Capital expenditure	Revenue expenditure
Purpose	Acquire/improve a fixed asset	Run/maintain the business
Benefit	More than one year	Within the same year
Shown in	Balance Sheet (asset)	Trading / P&L Account

Start your 14-day free trial to unlock the full solution →

Capital expenditure buys or improves a fixed asset (benefit > 1 year, shown as an asset); revenue expenditure runs/maintains the business (benefit within the year, charged to P&L). The listed items are classified accordingly.

Distinction

Basis	Capital Expenditure	Revenue Expenditure
Meaning	Incurred to acquire, extend or improve a fixed asset, or to raise its earning capacity	Incurred in the normal running of the business and to maintain earning capacity
Benefit	Extends beyond one accounting year	Exhausted within the accounting year
Nature	Non-recurring (usually)	Recurring
Treatment	Capitalised — shown as an asset in the Balance Sheet	Charged to the Trading / Profit and Loss Account
Effect	Increases the value/earning capacity of an asset	Only keeps the asset working at its present level

Classification of the given items

#	Item	Classification	Reason
1(a)	Repairs and whitewashing of an old building at purchase, to make it usable	Capital	Cost of bringing the asset to a usable condition — part of its cost
1(b)	Extra exit built in a cinema hall on government order	Capital	Improves and adds to the fixed asset (building)
2(a)	Registration fees paid on purchase of a building	Capital	An acquisition cost added to the building

Start your 14-day free trial to unlock the full solution →

←Previous question · questions-for-practiceQ4 — What is a balance sheet. What are its characteristics?→Next question · questions-for-practiceQ6 — What is an operating profit?

Q.Distinguish between capital and revenue expenditure and state whether the following statements are items of capital or revenue expenditure :

🎓Unlock everything free for 14 days

Unlock everything free for 14 days