Accounting · Theoretical Framework

Capital and Revenue Items and Accounting Terms for CA Foundation

Updated 1 October 2026

Capital items give benefit over more than one year or change the business's fixed assets or capital base. Revenue items are for day-to-day running and benefit only the current year. Capital items go to the Balance Sheet. Revenue items go to the Profit and Loss Account. Deferred revenue expenditure is revenue in nature but spread over several years.

Understand Capital and Revenue Items and Accounting Terms

Every rupee a business spends or receives is either capital or revenue. This split decides where it appears in the final accounts. Get it wrong and profit and assets are both wrong.

Capital expenditure buys or improves an asset that will serve the business for more than one accounting year. It also covers money spent to bring an asset to its working condition. Examples: buying machinery, freight and installation on that machinery, legal fees for buying land, and an extension that increases a building's capacity. It is shown as an asset in the Balance Sheet.

Revenue expenditure is spent to run the business in the current year or to maintain assets in working order. Examples: salaries, rent, repairs, depreciation, insurance, and purchase of goods for resale. It is charged to the Profit and Loss Account (or Trading Account) of the year.

Receipts follow the same logic. Capital receipts come from owners or lenders, or from selling fixed assets: capital introduced, loan taken, sale of old machinery. They are not income. Revenue receipts come from normal operations: sales, commission, interest and rent received. They are credited to the Profit and Loss Account.

Deferred revenue expenditure is revenue in nature, but its benefit lasts several years. Examples are a heavy advertising campaign for a new product, or large preliminary expenses. In the traditional approach used in exam questions, it is written off over a few years. The unwritten-off balance is shown in the Balance Sheet as a fictitious or deferred asset (or under Other Assets) until it is fully charged. It is not a real, lasting asset. Under AS 26 / Ind AS 38, expenditure such as preliminary expenses and advertising is generally expensed when incurred; deferred revenue expenditure is a traditional concept used in exam questions unless told otherwise. So follow the question's instruction.

The test is purpose and benefit, not the item's name. Repairs are revenue. But a repair that adds to the asset's life or capacity, or puts a second-hand asset into usable condition, is capital. The same item can be capital for one business and revenue for another. A computer is a fixed asset for a trader but stock for a computer dealer.

Key rules to remember

Capital expenditure test: Benefit for more than one year OR asset acquired/improved → Capital; Includes the cost of bringing the asset to its working condition, such as freight, installation and legal fees.
Revenue expenditure test: Benefit within the current year OR only maintains earning capacity → Revenue; Debit to Trading or Profit and Loss Account.
Cost of a fixed asset: Purchase price + freight + installation + other costs to make it ready for use; Do not add later routine repairs or running costs.
Deferred revenue expenditure: Amount written off each year = Total expenditure ÷ Number of years of benefit; This is for equal write-off. The unwritten balance is shown as a fictitious/deferred asset (or under Other Assets) until charged. Under AS 26 / Ind AS 38, expenditure such as preliminary expenses and advertising is generally expensed when incurred; deferred revenue expenditure is a traditional concept used in exam questions unless told otherwise.
Effect of wrongly treating revenue as capital: Expense understated → Profit overstated → Asset overstated; The reverse mistake understates profit and the asset.

How to solve Capital and Revenue Items and Accounting Terms questions

Use this method for any classification or effect-on-profit question.

1Read the item and ask what the money was spent on or received for.
2Ask how long the benefit lasts. More than one year points to capital. Within the year points to revenue.
3Check the nature of the business. Goods bought for resale are revenue for a trader but a fixed asset if the business will use them.
4Check for special conditions: an expense that brings an asset to working condition, adds capacity or extends life is capital.
5Decide the treatment: capital goes to the Balance Sheet, revenue goes to the Trading or Profit and Loss Account, and a large benefit-over-years item may be deferred revenue.
6For profit-effect questions, recompute: add back wrongly capitalised revenue expense and deduct any extra depreciation on it.
7State the classification with a one-line reason. Reasons earn marks.

Quickest way: Three-question filter

When to use it: Use it for one-line classification questions where you must list items under capital or revenue.

Question 1: Is an asset acquired, improved, or made ready for use? If yes, it is capital.
Question 2: Does the item only maintain the business or run it this year? If yes, it is revenue.
Question 3: Is the revenue amount unusually large with multi-year benefit? Then call it deferred revenue expenditure.
Write each item with C or R and a short reason, such as 'Revenue: routine repair' or 'Capital: installation cost'.

Common mistakes in Capital and Revenue Items and Accounting Terms

Treating all repairs as revenue.
Students memorise 'repairs = revenue' without checking the purpose.
Fix: Ask if the repair adds capacity or life, or readies a second-hand asset for use. If so, it is capital.
Classifying by the item's name instead of the business's nature.
Lists in books show fixed examples like 'furniture is capital'.
Fix: Check how the business uses the item. Furniture bought by a furniture dealer for sale is a purchase, which is revenue.
Calling sale proceeds of a fixed asset a revenue receipt.
Cash coming in feels like income.
Fix: Sale of a fixed asset is a capital receipt. Only the profit or loss on sale goes to the Profit and Loss Account.
Forgetting freight, installation and legal costs in the asset cost.
Students stop at the invoice price.
Fix: Add every cost needed to bring the asset to working condition.
Treating deferred revenue expenditure as capital expenditure.
Both can show a balance in the Balance Sheet.
Fix: Deferred revenue is revenue in nature and is written off over a few years. Its balance is a fictitious/deferred asset, not a lasting asset, and it is not depreciated.
Mixing up the direction of the profit effect.
Students do not follow the debit to its destination.
Fix: Revenue expense wrongly capitalised means the expense was not charged. Profit is overstated and the asset is overstated.

Worked examples

Example 1

Classify each item as capital or revenue expenditure for a trading company, with a reason: (a) Purchase of a delivery van ₹6,00,000. (b) Road tax and insurance on the van for the year ₹30,000. (c) Carriage paid on the van's delivery to the company ₹5,000. (d) Repainting the old office ₹20,000.

Show the solution

(a) The van will serve for several years. Capital expenditure.
(b) Road tax and insurance are annual running costs. Revenue expenditure.
(c) Carriage is a cost of bringing the van to the business. Add it to the van's cost. Capital expenditure.
(d) Repainting only maintains the office. Revenue expenditure.
Van's cost in the books = ₹6,00,000 + ₹5,000 = ₹6,05,000.

Answer: (a) Capital, (b) Revenue, (c) Capital, (d) Revenue. The van is recorded at ₹6,05,000.

Example 2

A firm paid ₹40,000 for repairs to a machine and debited the amount to Machinery Account. Of this, ₹30,000 was routine repair and ₹10,000 was for fitting a part that increases capacity. Machinery is depreciated at 10% a year, and the full year's depreciation was charged on the entire ₹40,000. Find the effect on profit for the year and on Machinery after correcting the error.

Show the solution

Routine repair of ₹30,000 is revenue. It should have been charged to the Profit and Loss Account, not debited to Machinery.
The ₹10,000 for the part that increases capacity is capital. It stays in Machinery.
Wrong entry: the ₹30,000 was added to Machinery cost, so depreciation was charged on it too. Excess depreciation = 10% × ₹30,000 = ₹3,000.
Correction: charge ₹30,000 repairs to Profit and Loss Account, and credit Machinery (cost) by ₹30,000.
Also reverse the excess depreciation: reduce accumulated depreciation by ₹3,000 and reduce the depreciation charge in Profit and Loss Account by ₹3,000.
Net effect on profit = −₹30,000 + ₹3,000 = −₹27,000, so profit falls by ₹27,000.
Net Machinery = cost reduced by ₹30,000, less accumulated depreciation reduced by ₹3,000. Net book value falls by ₹30,000 − ₹3,000 = ₹27,000.

Answer: Profit for the year falls by ₹27,000. Machinery cost is reduced by ₹30,000 and accumulated depreciation by ₹3,000, so net Machinery falls by ₹27,000.

Exam tips

Always write a one-line reason with each classification. Marks are often given for the reason, not just C or R.
Read the business type first. The same item can be capital or revenue depending on the business.
In profit-correction questions, remember the depreciation on a wrongly capitalised amount.
Know the definitions of key accounting terms such as asset, liability, capital, drawings, debtors, creditors, purchases and sales. Short definition questions are common.
Show classification in a neat two-column table in your answer sheet, with Capital on one side and Revenue on the other, when asked to list items.

Practice questions from Theoretical Framework

Capital and Revenue Items and Accounting Terms: frequently asked questions

What is the difference between capital and revenue expenditure?

Capital expenditure creates or improves an asset with benefit beyond one year, and appears in the Balance Sheet. Revenue expenditure keeps the business running this year and is charged to the Profit and Loss Account.

What is deferred revenue expenditure?

It is expenditure that is revenue in nature, but its benefit continues for several years, for example a large advertising campaign. In exam questions it is written off over those years, and the unwritten balance is shown as a fictitious/deferred asset until it is charged. Under AS 26 / Ind AS 38, expenditure such as preliminary expenses and advertising is generally expensed when incurred; deferred revenue expenditure is a traditional concept used in exam questions unless told otherwise.

Is the sale of an old machine a capital or revenue receipt?

The sale proceeds are a capital receipt, because a fixed asset is being sold. The profit or loss on that sale is what goes to the Profit and Loss Account.

Can the same item be capital for one firm and revenue for another?

Yes. Computers are a fixed asset for a trader who uses them. They are stock-in-trade, and so revenue, for a firm that sells computers.