Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship

Capital and Revenue Items in Accounting Explained

Updated 10 October 2026 · Fact-checked

Capital items give benefit over many years and appear in the Balance Sheet. Revenue items give benefit in the current year and go to the Trading or Profit and Loss Account. Deferred revenue expenditure is revenue in nature but its large benefit spreads over several years, so it is written off in parts.

Understand Capital and Revenue Items

Every payment or receipt in a business is either capital or revenue in nature. This split decides where it is shown in the final accounts. A wrong split gives wrong profit and a wrong Balance Sheet.

Capital expenditure is spending that buys or improves a fixed asset, or adds to earning capacity, and gives benefit for more than one year. Buying a machine for ₹5,00,000 is capital expenditure. It is shown as an asset in the Balance Sheet. Its cost is spread over its life through depreciation.

Revenue expenditure is spending to run the business day to day or to maintain assets in working order. It gives benefit in the current year. Salaries, rent, electricity, repairs and depreciation are examples. It is charged to the Trading or Profit and Loss Account.

Deferred revenue expenditure is revenue in nature, but the amount is so large that its benefit will last several years. So only a part is charged to profit in the current year. The unwritten balance is shown as an asset in the Balance Sheet until written off. A heavy advertising campaign for a new product launch is a common example.

Receipts follow the same logic. Capital receipts come from the owner's capital, loans, or sale of fixed assets. They are not part of normal income and appear in the Balance Sheet. Revenue receipts come from the normal business, such as sales, interest and commission. They are credited to the Trading or Profit and Loss Account.

The key test is purpose, not the item's name. The same item can be capital for one business and revenue for another. A computer bought by a retailer for use is capital. A computer bought by a computer dealer for resale is revenue (purchases).

Key formulas to remember

Capital expenditure test: Acquires or improves a fixed asset / increases earning capacity / benefit beyond one year → Capital; Shown in the Balance Sheet as an asset. Depreciation on it is a revenue charge.
Revenue expenditure test: Day-to-day running or maintenance / benefit within the year → Revenue; Charged to the Trading or Profit and Loss Account.
Deferred revenue expenditure: Written off in current year = Total amount ÷ Number of years of benefit; Balance carried to Balance Sheet = Total − Amount written off; Equal write-off is the usual exam assumption unless the question gives another pattern.
Capital receipt vs revenue receipt: Capital: capital introduced, loans, sale of fixed assets. Revenue: sales, interest, commission, rent received; Capital receipts go to the Balance Sheet. Revenue receipts go to the Profit and Loss Account.
Repairs on purchase of second-hand asset: Cost of asset = Purchase price + Repairs to make it usable + Installation charges; These costs are capitalised. Later routine repairs are revenue.

How to solve Capital and Revenue Items questions

Use this method for any classification or treatment question.

1Read the item and find the business. Check what the business does, because purpose decides the class.
2Ask: does it buy, build, install or improve a fixed asset, or increase earning capacity? If yes, it is capital.
3Ask: is it only to run the business or keep an asset in its present working condition? If yes, it is revenue.
4Check the benefit period. If it is revenue in nature but benefit runs over several years and the amount is large, treat it as deferred revenue expenditure.
5For receipts, ask if it comes from normal operations (revenue) or from the owner, lenders or sale of a fixed asset (capital).
6Apply the treatment: capital to the Balance Sheet, revenue to Trading or Profit and Loss Account, deferred part to the Balance Sheet until written off.
7If a calculation is asked, compute the capital cost, the year's write-off and the balance carried forward, then check totals.

Quickest way: Purpose and period shortcut

When to use it: Use it for one-line MCQs asking whether an item is capital, revenue or deferred.

Look for words like purchase of, installation, erection, improvement, additions. These usually point to capital.
Look for words like repairs, maintenance, wages, rent, insurance, carriage on sales. These usually point to revenue.
Look for words like heavy advertising, launch, large amount, benefit over 3 years. These point to deferred revenue.
Check if the item is for resale. If so, it is revenue (stock), whatever the item is.
Eliminate options that put a revenue item in the Balance Sheet or a capital item in the Profit and Loss Account.

Common mistakes in Capital and Revenue Items

Treating all repairs as revenue.
Students memorise 'repairs = revenue'.
Fix: Repairs that improve the asset or make a newly bought asset usable are capital. Only routine upkeep is revenue.
Classifying by item name instead of purpose.
Lists of examples are learnt without the reason.
Fix: Always check why the item was bought. Goods bought for resale are purchases, even if they look like machinery.
Treating depreciation as capital expenditure.
It relates to a fixed asset, so it feels capital.
Fix: Depreciation is a revenue charge to the Profit and Loss Account. The asset cost itself is capital.
Treating sale proceeds of a fixed asset as revenue income.
Cash is received, so it seems 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.
Writing off the whole deferred revenue expenditure in the first year.
Students forget the benefit spans several years.
Fix: Divide by the benefit period and carry the balance to the Balance Sheet as an asset-like item.
Confusing loans received with income.
Both bring cash into the business.
Fix: Loans are capital receipts and create a liability. Interest paid on them is revenue expenditure.

Worked examples

Example 1

Classify each as capital or revenue expenditure: (a) Purchase of furniture ₹40,000 for the office; (b) Wages ₹15,000 paid for installing a new machine; (c) Whitewashing of office ₹8,000; (d) Purchase of a car ₹6,00,000 by a car dealer for sale.

Show the solution

(a) Furniture is a fixed asset used for years. It is capital expenditure.
(b) Wages spent to install a machine are needed to bring the asset into use. They are added to the machine's cost. Capital expenditure.
(c) Whitewashing is routine maintenance with benefit in the current year. Revenue expenditure.
(d) The car is bought for resale by a dealer. It is stock-in-trade, so it is revenue (purchases).

Answer: (a) Capital; (b) Capital; (c) Revenue; (d) Revenue.

Example 2

Ravi Traders spent ₹3,00,000 on a launch advertising campaign on 1 April, expected to benefit the business for 3 years equally. Find the amount charged to Profit and Loss Account for the first year and the balance shown in the Balance Sheet at the year end.

Show the solution

The expense is revenue in nature but its benefit lasts 3 years, so it is deferred revenue expenditure.
Write-off per year = ₹3,00,000 ÷ 3 = ₹1,00,000.
Charged to Profit and Loss Account in year 1 = ₹1,00,000.
Balance carried forward = ₹3,00,000 − ₹1,00,000 = ₹2,00,000, shown in the Balance Sheet.

Answer: ₹1,00,000 is charged to Profit and Loss Account; ₹2,00,000 appears in the Balance Sheet.

Exam tips

Most questions are one-line classification MCQs. Decide using purpose first, then benefit period.
Watch for trick items: goods for resale, repairs on a newly bought asset, and legal costs of buying property.
For deferred revenue, check the year of spending and how many years are left before computing the balance.
Remember sale of fixed assets is a capital receipt, but profit or loss on it is a Profit and Loss item.
With no negative marking, always attempt every question after eliminating options that break the treatment rule.

Practice questions from Financial Statements of Sole Proprietorship

Capital and Revenue Items 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 Items: frequently asked questions

What is the difference between capital and revenue expenditure?

Capital expenditure acquires or improves a fixed asset and benefits many years, so it goes to the Balance Sheet. Revenue expenditure runs the business in the current year and goes to the Trading or Profit and Loss Account.

What are examples of deferred revenue expenditure?

Heavy advertising for a new product launch, large preliminary costs and big research costs are common examples. The amount is revenue in nature but spread over the years of benefit. The unwritten part stays in the Balance Sheet.

Are capital receipts and revenue receipts different from expenditure?

They follow the same logic on the receipt side. Capital receipts such as capital introduced, loans and sale of fixed assets go to the Balance Sheet. Revenue receipts such as sales, interest and commission go to the Profit and Loss Account.

What happens if a capital item is wrongly treated as revenue?

Profit for the year is understated and assets are understated in the Balance Sheet. The reverse error overstates profit and assets. Either way the final accounts do not show a true picture.