Financial Accounting · General ledger accounts and journal entries

Capital and Revenue Transactions in the Ledger

Updated 11 October 2026 · Fact-checked

Capital items are long-term assets and the owner's investment; revenue items are day-to-day income and running costs. Capital expenditure goes to the statement of financial position; revenue expenditure goes to profit or loss. Capital introduced is Dr Bank, Cr Capital. Drawings are Dr Drawings, Cr Bank or Inventory. Purchases and sales are revenue entries.

Understand Capital and Revenue Transactions in the Ledger

Every transaction is either capital or revenue. The split decides where it ends up: the statement of financial position or the statement of profit or loss.

Capital expenditure buys or improves non-current assets, such as a machine, a building or a delivery van. It also covers costs needed to bring the asset into use, like delivery, installation and legal fees. The asset benefits the business for more than one year, so you record it as an asset and depreciate it over time.

Revenue expenditure is the cost of running the business day to day. Examples are wages, rent, electricity, repairs, and goods bought for resale. It is an expense in the period and reduces profit. Revenue income is income from normal trading, mainly sales. Capital income is money from non-trading sources, such as the owner's capital introduced, a loan, or proceeds from selling a non-current asset.

The owner's side is also capital, but in a different sense. Capital introduced is money or assets the owner puts in. It increases the owner's equity and is not income. Drawings are cash or goods the owner takes out for personal use. They reduce equity and are not an expense, so they never appear in profit or loss.

Goods bought for resale are purchases, and goods sold are sales. Both are revenue items. If the business buys a car to use, that is capital. If a car dealer buys the same car to sell, that is purchases. The nature of the business and the purpose of the item decide the answer.

Key formulas to remember

Capital expenditure rule: Asset bought or improved, or cost to bring it into use → Dr Non-current asset; Includes delivery, installation and legal costs. Shown in the statement of financial position and depreciated.
Revenue expenditure rule: Running cost or repair → Dr Expense account; Reduces profit in the period. Repairs restore an asset; improvements add capability and are capital.
Capital introduced (cash): Dr Bank; Cr Capital; Increases equity. Not income, so no entry in profit or loss.
Drawings (cash): Dr Drawings; Cr Bank; Closed to capital at the year end. Not an expense.
Drawings (goods): Dr Drawings; Cr Purchases (or Inventory); Use the cost of the goods, not the selling price.
Closing capital: Closing capital = Opening capital + Capital introduced + Profit − Drawings; Use a loss with a minus sign instead of profit.
Credit purchase and sale of goods: Purchase: Dr Purchases, Cr Payables. Sale: Dr Receivables, Cr Sales; Use Bank instead of Payables or Receivables if paid in cash.

How to solve Capital and Revenue Transactions in the Ledger questions

Use this method for any question on classifying or recording capital and revenue items.

1Identify what the business does. The same item can be capital for one business and purchases for another.
2Ask whether the item gives benefit beyond one year or is used up in the period. Long-term benefit means capital; used up means revenue.
3Check for owner transactions. Money in from the owner is capital introduced. Money or goods out for personal use is drawings.
4Decide the two accounts affected and which gets the debit. Assets and expenses are debited when they increase; capital, liabilities and income are credited when they increase.
5Write the entry as Dr and Cr with amounts. For goods taken as drawings, use cost.
6Check where each account ends up. Assets, capital and drawings go to the statement of financial position; sales and expenses go to profit or loss.
7Read the question's requirement once more: a classification, a journal, an amount or a closing capital figure.

Quickest way: Long-term or used up? Owner or business?

When to use it: Use it for multiple choice and multiple response questions that ask you to classify items or pick the correct entry.

Scan each item for the word 'asset', 'improve', 'install' or 'extend' (capital) versus 'repair', 'maintain', 'rent' or 'wages' (revenue).
Spot owner words: 'introduced', 'invested' or 'personal use'. These are capital or drawings, never profit items.
Eliminate any option that puts drawings in expenses or capital introduced in income.
For number entry on closing capital, write: opening + introduced + profit − drawings, and calculate once.

Common mistakes in Capital and Revenue Transactions in the Ledger

Treating drawings as an expense in profit or loss.
Money leaves the business, so it feels like a cost.
Fix: Drawings are a reduction in the owner's equity. They are never charged to profit or loss.
Treating capital introduced as income or sales.
Cash comes in, so students credit income.
Fix: Credit Capital. Income comes only from trading activities.
Expensing delivery or installation costs of a new machine.
Students see delivery and think it is a running cost.
Fix: Costs needed to bring an asset to working condition are part of its cost. Debit non-current assets.
Capitalising repairs.
The item is large or relates to an asset.
Fix: Repairs and maintenance that restore the asset are revenue. Only improvements and extensions are capital.
Recording goods taken by the owner at selling price.
Students use the price shown on the invoice or tag.
Fix: Record drawings of goods at cost, and credit Purchases or Inventory.
Putting the debit and credit the wrong way round.
Students memorise entries instead of working from the account types.
Fix: Ask which account increases and whether it is an asset or expense (debit) or equity or income (credit).

Worked examples

Example 1

A sole trader buys a machine for $12,000, pays $500 for delivery and $1,500 for installation, and pays $800 to repair another machine. How much is capital expenditure and how much is revenue expenditure?

Show the solution

The machine, delivery and installation are all costs of bringing the new asset into use.
Capital expenditure = $12,000 + $500 + $1,500 = $14,000.
The $800 repair restores an existing machine, so it is revenue expenditure.
Entries: Dr Machinery $14,000, Dr Repairs expense $800, Cr Bank $14,800.

Answer: Capital expenditure is $14,000 and revenue expenditure is $800.

Example 2

At 1 January a sole trader's capital is $40,000. During the year she pays $10,000 into the business bank account, takes $6,000 cash and goods that cost $1,000 for personal use, and makes a profit of $18,000. Give the journals for the owner items and calculate closing capital.

Show the solution

Capital introduced: Dr Bank $10,000, Cr Capital $10,000.
Cash drawings: Dr Drawings $6,000, Cr Bank $6,000.
Goods drawings at cost: Dr Drawings $1,000, Cr Purchases $1,000.
Total drawings = $6,000 + $1,000 = $7,000.
Closing capital = $40,000 + $10,000 + $18,000 − $7,000 = $61,000.

Answer: Closing capital is $61,000, after total drawings of $7,000.

Exam tips

Read the business type first. A van is capital for a baker but purchases for a van dealer.
In multiple response questions, select exactly the stated number and check each item for capital or revenue separately.
For drawings of goods, use cost unless the question states otherwise.
Remember that capital introduced and drawings never touch profit or loss. Many wrong options test exactly this.
In number entry questions, keep the sign of each figure and do the closing capital calculation in one line.

Practice questions from General ledger accounts and journal entries

Capital and Revenue Transactions in the Ledger in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Capital and Revenue Transactions in the Ledger: frequently asked questions

What is the difference between capital and revenue expenditure?

Capital expenditure buys or improves non-current assets that last more than one year. Revenue expenditure covers running costs used up in the period. Capital goes to the statement of financial position and revenue goes to profit or loss.

What is the journal entry for drawings?

For cash drawings, debit Drawings and credit Bank. For goods taken, debit Drawings and credit Purchases or Inventory at cost. Drawings are closed to the capital account at the year end.

How do I record capital introduced by the owner?

Debit Bank (or the asset introduced) and credit Capital. This increases the owner's equity. It is not income and has no effect on profit.

What is the difference between capital income and revenue income?

Revenue income comes from normal trading, such as sales. Capital income comes from other sources, such as capital introduced, loans or proceeds from selling a non-current asset.