Capital and Revenue Expenditure and Receipts

Capital expenditure (CapEx) is money spent on acquiring, constructing, improving or extending a non-current asset (also called a fixed asset or long-term asset). The benefit of the expenditure lasts for MORE than one accounting period.

Examples of capital expenditure:

• Purchase of land, buildings, machinery, vehicles, computers, office furniture
• Legal fees and stamp duty paid when BUYING property
• Installation costs and delivery charges for new machinery
• Building an extension to existing premises
• Major overhaul that EXTENDS the useful life of a machine
• Cost of testing and commissioning new equipment before use

Key principle: the asset appears on the statement of financial position and is then depreciated over its useful life. Only CAPITAL expenditure is depreciated.

Why legal fees on PURCHASE are capital: The legal fees are directly incurred to acquire the asset — they are an "attributable cost" that increases the value recorded for the asset on the SFP.

Borderline case — improvement vs repair:

• Improvement (capital): adds new capability, extends life, or increases value (e.g. adding a new room to a warehouse).
• Repair (revenue): restores the asset to its original working condition (e.g. repainting the warehouse).

Revenue expenditure (RevEx) is money spent on the DAY-TO-DAY running of the business. The benefit is used up within the current accounting period.

Examples of revenue expenditure:

• Rent of premises
• Wages and salaries
• Insurance premiums
• Electricity, gas, water bills
• Motor vehicle fuel and servicing costs
• Repairs and maintenance (restoring to original condition)
• Stationery, cleaning materials, small consumables
• Interest on bank loans (finance cost)
• Advertising costs

Where it goes: Revenue expenditure is an expense in the income statement (trading account or profit and loss account). It reduces profit in the current period.

Why routine servicing is revenue expenditure: Servicing a vehicle does not increase its capacity or extend its life beyond what was originally expected — it simply maintains normal operation.

Depreciation is a revenue expenditure: Although depreciation relates to a capital asset, the depreciation CHARGE each year is a revenue expenditure (an expense in the income statement), not the asset itself.

Capital receipts are money received from NON-TRADING activities:

• Proceeds from selling a non-current asset (e.g. old machinery)
• Bank loans received
• Capital introduced by the owner
• Grants received for purchasing assets
• Proceeds from issuing shares (for companies)

Capital receipts are NOT included in the income statement as income. They go to the statement of financial position (increasing loans or capital) or the disposal account.

Revenue receipts are money received from NORMAL TRADING activities:

• Sales of goods or services (the main trading income)
• Rent received (if the business lets out premises)
• Commission received
• Discount received from suppliers
• Interest received on bank deposits

Revenue receipts are income in the income statement and increase profit.

Key distinction: Does the receipt arise from the normal day-to-day activities of the business (revenue) or from a one-off financial or asset transaction (capital)?

Correctly classifying expenditure is critical because misclassification affects both profit and asset values.

Case 1: Capital expenditure treated as revenue expenditure Example: $5 000 spent buying a computer is debited to Purchases (expense) instead of Computer Equipment (asset).

Effect	Result
Expenses are overstated by $5 000	Profit is UNDERSTATED (too low)
Non-current assets are understated	Asset values on SFP are too LOW

Case 2: Revenue expenditure treated as capital expenditure Example: $1 200 of repair costs is debited to Buildings account (asset) instead of Repairs expense.

Effect	Result
Expenses are understated by $1 200	Profit is OVERSTATED (too high)
Non-current assets are overstated	Asset values on SFP are too HIGH

Why this matters:

• Overstated profit leads to over-drawing by the owner or excessive dividends — draining cash the business needs.
• Understated profit may lead the owner to think the business is performing worse than it is.
• Incorrect asset values mislead lenders and investors about the financial position.

Memory aid:

• RevEx hidden in CapEx → expenses understated → profit inflated (overstated).
• CapEx hidden in RevEx → expenses inflated → profit deflated (understated).