CMA Foundation · Fundamentals of Financial and Cost Accounting

Capital and Revenue Transactions for CMA Foundation FFCA

Capital and revenue transactions split business items by their benefit. Capital items give benefit over more than one year or change the fixed assets or capital base. Revenue items are used up in the current year. Capital items go to the Balance Sheet. Revenue items go to the Profit and Loss Account. To solve MCQs, ask what the money bought and how long the benefit lasts.

What this chapter covers

This chapter teaches you one decision rule and applies it to expenses, receipts, profits and losses. The rule is simple. Does the item give a long-term benefit or change the structure of the business? Then it is capital. Does it relate to day-to-day running and the current year's earnings? Then it is revenue.

You study five topics. You start with capital and revenue expenditure, which is the base. Then you apply the same test to receipts. Then you see deferred revenue expenditure, a revenue item that is spread over several years because its benefit lasts longer. Next come capital and revenue profits and losses. The last topic is a list of specific items, such as repairs, legal costs, carriage and brokerage, and how each is treated.

This chapter links directly to the rest of FFCA. It decides what goes into the Trading and Profit and Loss Account and what goes into the Balance Sheet. It also affects depreciation, final accounts and adjustments. If you get the classification wrong, profit and the value of assets both come out wrong. Cost accounting later uses the same idea when it separates capital items from costs.

This chapter is short, and its questions are mostly conceptual. That makes it a good place to collect marks quickly in a one-hour paper of 50 MCQs with no negative marking. The same classification skill also helps you in final accounts and depreciation, so the effort pays off in more than one chapter. Students who learn the rule and a fixed list of standard cases can answer most questions in seconds.

Capital and Revenue Transactions: topics in the order to study them

1Capital and Revenue ExpenditureThis is the base test. Every other topic uses the same logic, so learn it first.
2Capital and Revenue ReceiptsIt applies the same test to money coming in, such as sale of fixed assets versus sale of goods.
3Deferred Revenue ExpenditureStudy it after both basics, because it is a revenue item that behaves partly like a capital item.
4Capital and Revenue Profits and LossesProfits and losses follow from the expenditure and receipt rules, so they are easy once those are clear.
5Treatment of Specific Items in AccountsThis is the practice list. Do it last so you can apply the rules to each case.

How to prepare Capital and Revenue Transactions

Treat this chapter as one test plus a set of standard cases. Aim to decide each question in under thirty seconds.

Learn the core test in your own words: long-term benefit or change in business structure means capital; current-year running means revenue.
Write a two-column list of capital and revenue items for expenditure, then do the same for receipts.
Learn deferred revenue expenditure with one example, such as heavy advertising for a new product, and note that only part is charged each year.
For profits and losses, ask what was sold. Profit on sale of a fixed asset is capital. Profit on sale of goods is revenue.
Memorise the standard cases: repairs, carriage on purchase of machinery, legal costs for a title, brokerage, and installation costs.
Solve MCQs in sets of 15 and note why each wrong option fails the test.
On the last day, reread your two lists and the specific items once.

Common mistakes in Capital and Revenue Transactions

Classifying an item by its name instead of its purpose.
Fix: Ask what the money achieved. Repairs that restore are revenue. Repairs that add capacity or life are capital.
Calling every large expense capital.
Fix: Use the nature test, not the amount. A large wage bill for routine work is still revenue.
Treating the sale of a fixed asset as revenue income.
Fix: If the business sold an asset it was using, and not stock, the receipt is capital.
Confusing deferred revenue expenditure with capital expenditure.
Fix: Remember that deferred items are revenue in nature. They are written off over a few years and do not remain as assets forever.
Forgetting to add the cost of bringing an asset into use to its cost.
Fix: Carriage, freight, erection and installation costs paid to get a new asset ready for use are capital.
Ignoring the type of business when classifying an item.
Fix: A car is capital for a trader that uses it. It is stock for a car dealer, so the purchase is revenue.

Last-day revision: Capital and Revenue Transactions

Capital expenditure gives benefit beyond one year or adds to the earning capacity of the business.
Revenue expenditure is incurred to run the business and earn the current year's profit.
Capital items go to the Balance Sheet. Revenue items go to the Profit and Loss Account.
Purchase of machinery is capital. Purchase of goods for resale is revenue.
Cost of installing a new machine and carriage on it are added to the machine cost.
Ordinary repairs are revenue. Repairs that extend the life or capacity of an asset are capital.
Sale of a fixed asset is a capital receipt. Sale of goods is a revenue receipt.
Capital introduced by the owner and loans received are capital receipts.
Deferred revenue expenditure is a revenue item whose benefit lasts several years, so it is written off over those years.
The unwritten-off part of deferred revenue expenditure is shown in the Balance Sheet.
Profit on sale of a fixed asset is a capital profit. Trading profit is a revenue profit.
Wrongly treating capital as revenue understates profit and assets. Treating revenue as capital overstates both.

Capital and Revenue Transactions practice questions

Capital and Revenue Transactions 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: frequently asked questions

What is the difference between capital and revenue expenditure?

Capital expenditure gives long-term benefit and adds to assets or earning capacity. Revenue expenditure is incurred for running the business and its benefit is used up in the year. This decides whether the item goes to the Balance Sheet or the Profit and Loss Account.

Is deferred revenue expenditure capital or revenue?

It is revenue in nature. It is spread over a few years because the benefit lasts longer than one year. The part not yet written off is shown as an asset in the Balance Sheet.

How many questions can I expect from this chapter?

The exact number changes from paper to paper, so do not rely on a fixed count. The chapter is short and conceptual, so it is worth preparing fully. Since there is no negative marking, attempt every question.

How do I solve these MCQs fast?

Read the item and ask what was bought and how long the benefit lasts. Eliminate options that put it in the wrong account. Check the business type if an item could be stock or an asset.