Revenue Expenditure vs Capital Expenditure: Accounts
Correctly classifying an expenditure as Revenue or Capital determines whether it hits the P&L Account or the Balance Sheet — a concept tested in every CA Foundation Accounts paper.
head-to-Head Comparison
| Basis | Revenue Expenditure | Capital Expenditure |
|---|---|---|
| Nature of Benefit | Benefit is consumed within the same accounting period (short-term) | Benefit extends over multiple accounting periods (long-term) |
| Accounting Treatment | Debited to the Profit & Loss Account (reduces profit) | Shown as an Asset in the Balance Sheet (capitalised) |
| Effect on Assets | Does NOT create or improve a fixed asset | Creates a new fixed asset or extends the useful life of an existing one |
| Examples | Rent, salaries, repairs, stationery, insurance premium, interest | Purchase of machinery, construction of building, cost of patent, goodwill purchased |
| Recurrence | Generally recurring (regular/periodic) | Generally non-recurring (one-time or infrequent) |
The 'Repair vs Improvement' Trap
Ordinary Repairs (e.g., oiling a machine) = Revenue Expenditure. Major Improvements that extend the life or increase the capacity of an asset = Capital Expenditure. The key question: Does the expenditure maintain the existing level, or does it enhance the asset beyond its original state?
Common Ground (Similarities)
- Both involve outflow of money (cash or credit) from the business.
- Both affect the profitability and financial position of the firm.
- Both must be recorded in the books of accounts following the applicable accounting standards.
Test Your Understanding
Q1: Installation charges for a new machine are treated as:
Revenue Expenditure
Capital Expenditure ✅
Deferred Revenue Expenditure
None of the above
Explanation: Installation charges are part of the cost of bringing the asset to its working condition. They are capitalised and added to the cost of the machine (Capital Expenditure).
Q2: Annual premium paid on fire insurance for machinery is:
Capital Expenditure
Deferred Revenue Expenditure
Revenue Expenditure ✅
Capital Loss
Explanation: Insurance premium is a periodic payment whose benefit is for one accounting year only — a typical Revenue Expenditure charged to the P&L Account.