Summary
Capital and revenue items are fundamental to understanding financial transactions in accounting, with capital items relating to long-term benefits and revenue items to short-term operations.
- Capital Expenditure — money spent on acquiring or improving non-current assets that benefit the business for more than one accounting period.
Example: Purchase of machinery. - Revenue Expenditure — costs incurred for the day-to-day running of the business, consumed within the current accounting period.
Example: Wages and salaries. - Capital Receipts — money received from the sale of non-current assets or additional capital introduced, not part of regular income.
Example: Sale of a building. - Revenue Receipts — income from normal trading activities, recorded in the income statement.
Example: Sales revenue.
Exam Tips
Key Definitions to Remember
- Capital Expenditure: Money spent on non-current assets.
- Revenue Expenditure: Day-to-day running costs.
- Capital Receipts: Money from selling non-current assets.
- Revenue Receipts: Income from trading activities.
Common Confusions
- Confusing capital expenditure with revenue expenditure.
- Misclassifying capital receipts as revenue receipts.
Typical Exam Questions
- What is capital expenditure?
Money spent on non-current assets. - How does revenue expenditure affect profit?
It reduces profit as it is recorded as an expense. - What happens if capital expenditure is treated as revenue?
Profit is understated.
What Examiners Usually Test
- Correct classification of expenditures and receipts.
- Impact of misclassification on financial statements.
- Understanding of how capital and revenue items affect profit and asset valuation.