Skip to content

Financial Accounting · Tangible non-current assets

Capital vs Revenue Expenditure: Differences and Examples for ACCA FA

Updated 11 October 2026 · Fact-checked

Capital expenditure buys or improves a non-current asset that will give benefit for more than one period, so it is added to the statement of financial position. Revenue expenditure is day-to-day running cost, so it is charged to profit or loss. To solve a question, ask what the spend achieved: new asset, better asset, or just upkeep.

Understand Capital vs Revenue Expenditure

Every business spends money. Some spending is used up quickly, such as wages, electricity and repairs. Other spending buys something that will help the business for several years, such as a machine or a building. Accounting must show this difference, or profit would be wrong.

Revenue expenditure is spending on running the business or on keeping assets in their current working condition. It is charged to profit or loss in the period. Capital expenditure is spending to acquire a non-current asset, or to improve it so that it gives more future benefit. It is recorded as an asset and then depreciated over its useful life.

Under IAS 16, an item of property, plant and equipment is recognised at cost. Cost includes the purchase price (after deducting trade discounts and rebates, and including import duties and non-refundable purchase taxes) plus any cost directly attributable to bringing the asset to the location and condition needed for it to operate as management intends. Examples are delivery, installation, site preparation, professional fees and testing costs. It also includes the initial estimate of dismantling and site restoration costs where there is an obligation.

Some costs are never part of the asset. These include administration and general overheads, training staff to use the asset, costs of opening a new facility, advertising, and costs incurred after the asset is ready but not yet in use. Initial operating losses are also excluded. These go to profit or loss.

After the asset is in use, ask what the later spending does. Repairs and maintenance that keep the asset at its original standard are revenue. Spending that replaces a significant part, extends useful life, or improves output or quality is capital, provided it meets the recognition criteria. If a replaced part is capitalised, the carrying amount of the old part is derecognised.

Why it matters: wrongly capitalising a cost overstates profit and assets in the current year. Wrongly expensing a capital cost understates both.

Key formulas to remember

Cost of a non-current asset (IAS 16)
Cost = Purchase price (net of trade discounts) + import duties and non-refundable taxes + directly attributable costs + initial estimate of dismantling/restoration costs
Directly attributable costs include delivery, installation, site preparation, testing and professional fees. Recoverable sales tax is not included.
Costs excluded from the asset
Administration and general overheads, staff training, advertising, initial operating losses, and repairs and maintenance = expense in profit or loss
If it does not bring the asset to working condition, it is not capital.
Subsequent expenditure rule
Improves or extends the asset or replaces a significant part = capital. Restores or maintains the existing standard = revenue
Check whether future economic benefits increase beyond the original assessment.
Effect of misclassification
Capitalised in error: profit and assets overstated. Expensed in error: profit and assets understated
Depreciation on the wrongly capitalised amount partly reduces the overstatement.

How to solve Capital vs Revenue Expenditure questions

Use this method for any question that asks you to classify expenditure or calculate the cost of an asset.

  1. 1List each item of expenditure separately.
  2. 2Decide whether it is spending on acquiring or bringing a new asset into use, or on subsequent spending on an asset already in use.
  3. 3For initial cost, ask: is it the purchase price or directly needed to get the asset ready for its intended use? If yes, capitalise it.
  4. 4Exclude general overheads, training, advertising and operating losses, even if they relate to the asset.
  5. 5For subsequent spending, ask: does it improve, extend life or replace a significant part? If yes, capitalise it. If it only maintains the standard, expense it.
  6. 6Adjust the purchase price for trade discounts and for sales tax that is recoverable, which is not part of cost.
  7. 7Add up the capital items for the asset cost and the rest for profit or loss.
  8. 8State the effect on profit or assets if the question asks about errors.

Quickest way: The upgrade-or-upkeep test

When to use it: Use it for multiple choice questions that list several costs and ask which are capital.

  1. For each item, ask: is it needed to get the asset ready, or does it make the asset better?
  2. If yes, mark C for capital.
  3. If it keeps the asset running as before, or is a general cost, mark R for revenue.
  4. Watch for trap words: training, repairs, maintenance, advertising, overheads and opening costs are all R.
  5. Watch for trap words: delivery, installation, legal fees on purchase, testing and site preparation are all C.
  6. Check the question wants the total of capital items or revenue items, then add only those.

Common mistakes in Capital vs Revenue Expenditure

  • Capitalising staff training costs for a new machine

    Training feels directly linked to the machine.

    Fix: IAS 16 excludes training. It does not bring the asset to its location or condition. Expense it.

  • Treating all repairs as revenue

    Students memorise that repairs are revenue.

    Fix: Read what the work does. Replacing a major part or upgrading capacity is capital. Restoring the original standard is revenue.

  • Including recoverable sales tax in the cost of the asset

    Students use the gross invoice total.

    Fix: If the business can reclaim the tax, exclude it from cost. Only non-refundable taxes are included.

  • Forgetting to deduct trade discounts

    Students start from the list price.

    Fix: Always deduct trade discounts and rebates from the purchase price first.

  • Capitalising general overheads or operating losses

    Costs occur around the same time as the purchase.

    Fix: Only directly attributable costs count. Overheads and initial losses are expenses.

  • Missing the effect on profit after an error

    Students correct the asset but ignore the expense or depreciation.

    Fix: Work out the profit effect first. A wrongly capitalised cost reduces expenses, so profit is overstated.

Worked examples

Example 1

A company buys a machine with a list price of $80,000, less a 10% trade discount. Delivery costs $2,000, installation $3,000, and staff training $1,500. Annual maintenance of $2,500 is paid in the first year. Sales tax is recoverable. Calculate the cost of the machine to be capitalised.

Show the solution
  1. Trade discount: $80,000 × 10% = $8,000, so net price = $72,000.
  2. Add delivery $2,000 and installation $3,000 as directly attributable costs.
  3. Exclude training of $1,500, which is an expense.
  4. Exclude maintenance of $2,500, which is revenue expenditure.
  5. Sales tax is recoverable, so it is excluded from cost.
  6. Cost = 72,000 + 2,000 + 3,000 = 77,000.

Answer: The machine is capitalised at $77,000. Training of $1,500 and maintenance of $2,500 go to profit or loss.

Example 2

A business spent $12,000 on a delivery van: $5,000 replacing the engine with a larger one that extends its useful life, $4,000 on routine servicing and $3,000 on repainting it with the company logo. The engine replacement meets the recognition criteria. How much is capital and how much is revenue expenditure?

Show the solution
  1. The engine replacement extends useful life and replaces a significant part, so it is capital: $5,000.
  2. Routine servicing maintains the existing standard, so it is revenue: $4,000.
  3. Repainting with the logo is advertising, so it is revenue: $3,000.
  4. Revenue total = 4,000 + 3,000 = 7,000.
  5. Check: 5,000 + 7,000 = 12,000.

Answer: Capital expenditure is $5,000 and revenue expenditure is $7,000.

Exam tips

  • Objective test questions often list five or six costs. Classify each one on paper before looking at the options.
  • For number entry, show the cost build-up: start with the net price, then add only attributable costs.
  • Check whether sales tax is recoverable. The question usually states it. If not stated, follow the wording given.
  • In Section B, expect the cost of an asset to feed into a depreciation or disposal calculation. Get the cost right first.
  • Read what the work achieves, not what it is called. A repair that increases capacity is capital.

Practice questions from Tangible non-current assets

Capital vs Revenue Expenditure in other exams

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

Capital vs Revenue Expenditure: frequently asked questions

What is the difference between capital and revenue expenditure?

Capital expenditure acquires or improves a non-current asset and is shown on the statement of financial position, then depreciated. Revenue expenditure is the day-to-day running cost and is charged to profit or loss in the period.

What costs can be capitalised under IAS 16?

The purchase price net of trade discounts, import duties, non-refundable taxes, and costs directly attributable to getting the asset ready for use. Examples are delivery, installation, testing and professional fees. Initial estimates of dismantling and restoration costs are also included where an obligation exists.

Are repairs capital or revenue expenditure?

Normal repairs and maintenance are revenue because they keep the asset in its current condition. If the work replaces a significant part or improves the asset beyond its original standard, it is capital.

Why does wrongly capitalising an expense matter?

It moves a cost out of profit or loss and into assets. Profit and net assets are overstated in that year. Later depreciation reduces the overstatement only slowly.