Capital and revenue expenditure and receipts

Revise Capital and revenue expenditure and receipts for Accounting 0452 (O Level) — revision notes, 50 practice questions and instant AI marking.

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Cambridge IGCSE Accounting 0452

Capital and Revenue Expenditure and Receipts

The big idea: Spending that buys or improves a non-current asset is capital and goes to the statement of financial position; spending on running the business is revenue and goes to the income statement. Put an item on the wrong side and both profit and assets are wrong.

Summary — What This Chapter Covers

Capital expenditure: buying or improving non-current assets, including the costs of getting them ready for use.
Revenue expenditure: the day-to-day running costs of the business, including repairs and maintenance.
Capital receipts (capital introduced, loans, sale of non-current assets) are not income; revenue receipts (sales, rent received, commission, discount received) are.
Treating capital expenditure as revenue understates profit and assets; treating revenue expenditure as capital overstates both.

1. Capital and Revenue Expenditure

Syllabus 4.1 · Paper 1 & 2

Will it benefit the business for more than one year?

Capital expenditure is money spent on buying, adding to or improving non-current assets, so that they earn revenue for more than one year. It includes every cost needed to get the asset ready for use: delivery (carriage on the asset), installation, legal fees on buying premises, and the cost of building an extension. It is debited to the asset account and shown in the statement of financial position.

Revenue expenditure is money spent on running the business day to day, which is used up within the year: wages, rent, fuel, insurance, repairs, maintenance and redecoration. It is debited to an expense account and charged in the income statement.

Improvement or repair?

An extension, a new engine that makes a van last longer, or fitting air-conditioning improves the asset: capital. Replacing a broken window or servicing a van keeps it working as before: revenue.

Worked Example

A business bought a machine for $12,000. It paid delivery $400, installation $600, a one-year maintenance contract $900 and later a repair of $250. Calculate the capital expenditure and the revenue expenditure.

Practice Question 1

Classify each item as capital or revenue expenditure: (a) legal fees on buying a shop; (b) painting the existing shop; (c) building a storeroom extension; (d) fuel for the delivery van; (e) a new computer for the office; (f) carriage paid on a new machine.

2. Capital and Revenue Receipts

Syllabus 4.1 · Paper 1 & 2

Not every inflow of money is income

Revenue receipts come from the normal activities of the business and are shown as income in the income statement: sales (revenue), rent received, commission received, discount received, interest received.

Capital receipts are not earned from trading, so they never appear in the income statement: capital introduced by the owner, a loan received, and the proceeds of selling a non-current asset (which go to the disposal account, Topic 4.2).

Receipt	Type	Where it is recorded
Cash sales of goods	Revenue	Revenue in the income statement
Rent received from sub-letting part of the premises	Revenue	Other income in the income statement
A five-year bank loan	Capital	Non-current liability in the statement of financial position
Owner pays in extra capital	Capital	Capital account

Practice Question 2

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Wrong side, wrong profit, wrong assets

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Capital and revenue expenditure and receipts