www.gradeup.

co
www.gradeup.co

Capital and Revenue Transactions

Capital Expenditure refers to the amount spent by an enterprise on purchase of fixed assets that are
used in the business to earn income and are not intended for resale. Fixed assets purchased may be
tangible or intangible.
Following are the types of expenditure that are usually treated as capital expenditure:
• Expenditure resulting in acquiring or bringing into existence an asset or advantage of enduring
benefit: An asset means anything that can be acquired for a long time such as a building. Money
spent in acquiring an asset is a part of capital expenditure.
• Expenditure for the extension of or improvement in fixed assets: If the profit-earning capacity
increases because of any expenditure through lowering costs or increasing output, the
expenditure will be treated as capital expenditure.
• Expenditure related to the purchase, receipt or installation of a fixed asset: All expenses in
addition to the purchase price incurred for making the asset ready for use are totaled to the cost
of the asset and thus are capital expenditure. For example, wages paid to workers for erecting
machinery, interest on the loan raised to purchase a fixed asset.
Expenses which are incurred after the asset has been put to use are not capital expenditure.
• Expenditure related to acquiring a tangible asset: Even if the asset does not prove to be
profitable, the expenditure on it is a capital expenditure.

Capital Expenditure is debited to a fixed account that further appears in the Balance sheet.

Revenue Expenditure refers to the amount spent on running a business. The benefit of revenue
expenditure is depleted in the accounting period in which it is incurred. Following are the types of
expenditure that are usually treated as revenue expenditure:
• Expenses incurred in the day-to-day running of the business: Expenses such as rent, salaries,
wages, power, fuel etc are considered as revenue expenditure.
• Expenses incurred for upkeep of fixed assets
• Expenses incurred on purchase of stock of materials and goods to a degree that these are used up
during the year, the remaining amount will be an asset.
• Depreciation or the expired cost of the fixed assets.

➢ Difference between Capital Expenditure and Revenue Expenditure

1. Capital Expenditure are the expenditure which are incurred for the acquisition of fixed assets
for use in a business whereas Revenue Expenditure is incurred for conduct of business.

2. The benefit of Capital Expenditure extends to more than one year whereas the benefit of
Revenue Expenditure extends to only one year.

3. Capital Expenditure is debited to an asset account whereas Revenue Expenditure is debited to

an expense account.

4. Capital Expenditure is a real account whereas Revenue Expenditure is a nominal account.

5. Capital Expenditure is shown in a Balance Sheet whereas Revenue Expenditure is a part of the
Trading or Profit and Loss Account.

➢ Deferred Revenue Expenditure

www.gradeup.co

It is an expenditure which is incurred during an accounting period but the benefit arising out of it
extends beyond that accounting period. Such expenditure is usually larger than the normal
expenditure under the head. For example, expenditure incurred on advertising a new product
will certainly give benefit in the periods beyond the accounting period in which it was incurred.

Deferred revenue expenditure is different from Prepaid Expenses because the benefits of
deferred revenue expenses cannot be precisely estimated whereas the benefits of prepaid
expenses can be precisely estimated.

A Deferred Revenue Expenditure, although appears on the assets side of the Balance Sheet, it is
not really an asset for the business.

***