distinguish between and account for capital expenditure and revenue expenditure
4.1 Capital and Revenue Expenditure & Receipts
📚 What you’ll learn today: • What is capital expenditure and revenue expenditure? • How to record each type in the accounts. • The difference between capital receipts and revenue receipts. • Quick exam‑ready tips.
Capital Expenditure (CapEx)
Capital expenditure is money spent to buy or improve an asset that will be useful for more than one accounting period. Think of it as buying a new bike 🚴♂️ that you’ll ride for years.
- Examples: buying a factory, buying a computer system, renovating a shop.
- It is recorded as an asset on the balance sheet.
- Depreciated over its useful life:
$\displaystyle \text{Depreciation Expense} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}}$ - In the profit & loss account, only the depreciation expense is shown, not the full cost.
Revenue Expenditure (RevEx)
Revenue expenditure is money spent on items that are used up or consumed within the same accounting period. Think of it as buying batteries for the bike 🔋 – you need new ones every month.
- Examples: wages, rent, office supplies, repairs.
- It is recorded directly as an expense in the profit & loss account.
- It does not appear on the balance sheet as an asset.
- Because it is consumed quickly, it is fully deducted from profits in the period it is incurred.
Capital Receipts
Capital receipts are money received that increases the value of an asset or reduces a liability that will last beyond the current period.
- Examples: sale of a building, loan proceeds used to buy equipment.
- Recorded in the balance sheet (e.g., as “Cash” or “Loan Payable”).
- Not shown in the profit & loss account.
Revenue Receipts
Revenue receipts are money received that increases the company’s profits for the current period.
- Examples: sales revenue, interest income, service fees.
- Recorded in the profit & loss account.
- Do not affect the balance sheet directly (except via retained earnings).
Key Differences – Quick Reference Table
| Type | What it affects | Where it appears | Example |
|---|---|---|---|
| Capital Expenditure | Assets & Depreciation | Balance Sheet (asset) & P&L (depreciation) | Buying a new factory |
| Revenue Expenditure | Expenses | Profit & Loss account | Paying rent |
| Capital Receipt | Assets or Liabilities | Balance Sheet | Loan proceeds for equipment |
| Revenue Receipt | Profit | Profit & Loss account | Sale of goods |
Exam Tips & Tricks
1️⃣ Identify the period of benefit: If the benefit lasts >1 year, it’s capital. If it’s used up within the year, it’s revenue.
2️⃣ Check the account type: Capital items go to the balance sheet; revenue items go straight to the P&L.
3️⃣ Remember the “depreciation rule”: Capital expenditure is depreciated, revenue is not.
4️⃣ Use the analogy: Bike vs batteries – it’s a quick mental check!
5️⃣ Practice with past exam questions: Look for keywords like “purchase,” “sale,” “loan,” “repair,” “wages.”
Revision
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