Revenue expenditure provides temporary benefits within the accounting year and does not result in acquisition of an asset. It is recurring and reduces profit. Capital expenditure provides long-term benefits over several years through acquisition or improvement of an asset. It is non-recurring and does not reduce profit. The document uses examples to distinguish between capital and revenue expenditures such as wages, transportation costs, repairs, and improvements to assets.

1. Difference between Capital Expenditure and
Revenue Expenditure
Revenue Expenditure
1. Its effect is temporary, i.e. the benefit is received
within the accounting year.
2. Neither an asset is acquired nor is the value of an
asset increased
3. It has no physical existence because it is incurred
on items which are used by the business
4. It is recurring and regular and it occurs repeatedly

2. Continued…
5. A portion of this expenditure (depreciation on
assets) is shown in trading & P & L A/c and the
balance is shown in the balance sheet on asset
side
6. This expenditure helps to maintain the business
7. The whole amount of this expenditure is shown
in trading P & L A/c or income statement
8. It does not appear in the balance sheet.
9. It reduces revenue (profit) of the business.

3. Capital Expenditure
1. Its effect is long-term, i.e. it is not exhausted within
the current accounting year-its benefit is received
for a number of years in future
2. An asset is acquired or the value of an existing asset
is increased
3. Generally it has physical existence except intangible
assets
4. It does not occur again and again. It is nonrecurring
and irregular
5. This expenditure improves the position of the
business

4. Continued…
6. It appears in the balance sheet until its
benefit is fully exhausted
7. It does not reduce the revenue of the
concern. Purchase of fixed asset does not
affect revenue.

5. Example:
State with reasons whether the following items of
expenditure are capital or revenue
• (i) Wages paid on the purchase of goods.
• (ii) Carriage paid on goods purchased.
• (iii) Transportation paid on machinery purchased.
• (iv) Duty paid on machinery.
• (v) Duty paid on goods.

6. Continued…
(vi) A second-hand car was purchased for £7,000 and
£5,000 was spent for its repairs and overhauling.
(vii) Office building was whitewashed at a cost of
£3,000.
(viii) A new machinery was purchased for £80, 000 and
a sum of £1,000 was spent on its installation and
erection.
(ix) Books were purchased for £50,000 and £1,000 was
paid for carrying books to the library.

7. Continued…
• (x) Land was purchased for £1, 00,000 and
£5,000 were paid for legal expenses.
• (xi) £50,000 was paid for customs duty and
freight on machinery purchased from Japan.
• (xii) Old furniture was repaired at a cost of
£500.
• (xiii) An additional room was constructed at a
cost of £15,000.

8. • (xiv) Damages paid on account of the breach
of contract to supply certain goods.
• (xv) Cost of replacement of an old and worn
out part of machinery.
• (xvi) Repairs to a motor car met with an
accident.
• (xvii) £10,000 paid for improving a machinery.
• (xviii) Cost of removing plant and machinery
to a new site.
8

9. Continued…
• (xix) Cost of acquiring the goodwill of an old firm.
• (xx) Cost of redecorating a cinema hall.
• (xxi) Cost of putting up a. gallery in a cinema hall.
• (xxii) Compensation paid to a director for loss of
his office.
• (xxiii) Premium paid on the redemption of
debentures.
• (xxiv) Costs of attending a mortgage.
• (xxv) Commission paid on issue of debentures.

10. Continued…
• (xxvi) Cost of air-conditioning the office of the
director of a company.
• (xxvii) Repairs and renewal of machinery.
• (xxviii) Cost of acquiring patent rights and trade
marks.
• (xxix) Compensation paid to workers for
termination of their services.
• (xxx) Compensation paid to a person injured by
company's car.
• (xxxi) Expenditures incurred on alteration in
windows ordered by local authorities.

11. • (xxxii) Painting expenditures of a newly-
constructed factory.
• (xxxiii) Expenditures incurred on renewal of
patent.
• (xxxiv) Expenditures on replacement of a slate
roof by a glass roof.
• (xxxv) £10,000 spent on
dismantling, removing and reinstalling
machinery and
fixtures.
• (xxxvi) legal expenses incurred in an income
tax appeal.