Why is "Treating delivery/installation of an asset as revenue" a common mistake in Capital & Revenue Expenditure?

Why it happens: They look like running costs. How to avoid it: Costs to bring an asset into use (delivery, installation, legal fees, testing) are CAPITAL — part of the asset's cost. Source: 9706 Examiner Reports

Why is "Not splitting a mixed repair/improvement invoice" a common mistake in Capital & Revenue Expenditure?

Why it happens: Treating the whole invoice one way. How to avoid it: Split the cost: the part that enhances the asset is capital; the part that repairs/maintains is revenue. Source: 9706 Examiner Reports

Why is "Treating all carriage inwards the same" a common mistake in Capital & Revenue Expenditure?

Why it happens: Same term used for goods and assets. How to avoid it: Carriage on goods for resale = revenue (cost of sales); carriage on a non-current asset = capital (part of its cost). Source: 9706 Examiner Reports

Why is "Forgetting the knock-on depreciation when revenue is wrongly capitalised" a common mistake in Capital & Revenue Expenditure?

Why it happens: Only adjusting the expense. How to avoid it: When revenue is capitalised, the asset is also over-depreciated; the net profit error = the amount less the extra depreciation. Source: 9706 Examiner Reports

Why is "Not capitalising own labour used to build an asset" a common mistake in Capital & Revenue Expenditure?

Why it happens: Wages are normally an expense. How to avoid it: Wages and materials used to CONSTRUCT a non-current asset are capitalised as part of its cost. Source: 9706 Examiner Reports

Why is "Getting the direction of the profit effect wrong" a common mistake in Capital & Revenue Expenditure?

Why it happens: Not tracing through expenses and assets. How to avoid it: Capital treated as revenue → expenses up → profit DOWN, assets DOWN. Revenue treated as capital → expenses down → profit UP, assets UP. Source: 9706 Examiner Reports

Cambridge International A Levels Accounting (9706)

Capital & Revenue Expenditure

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Detailed Study Notes

Detailed notes on Capital and Revenue Income and Expenditure for Cambridge International A Levels Accounting, covering key concepts, explanations, examples, and exam-focused revision points.

Capital & Revenue Expenditure — Cambridge AS & A Level Accounting 9706 Study Notes (2026-2028)

One classification decision behind hundreds of marks. Learn to tell capital expenditure (buying or improving non-current assets) from revenue expenditure (day-to-day running costs), handle the borderline items examiners love, and understand why getting it right matters for profit and the statement of financial position.

At a glance

Capital expenditure = spending to acquire or improve a non-current asset — long-term benefit.
Revenue expenditure = day-to-day running costs — benefit used up within the period.
Capital expenditure goes to the statement of financial position (as an asset); revenue expenditure goes to the statement of profit or loss (as an expense).
Costs to get an asset ready for use (delivery, installation, legal fees) are capital.
Repairs and maintenance are revenue; improvements that enhance the asset are capital.
Capital expenditure is depreciated over its useful life; revenue expenditure is charged in full now.
Misclassifying either one misstates both profit and net assets (subtopic 3).

What you’ll learn

Mapped to the Cambridge International A Level 9706 syllabus (2026-2028).

1.3.1 — Understand the difference between the treatment of capital and revenue expenditure.
1.3.1 — Understand the effect on profit/loss and asset value of the incorrect treatment of capital and revenue expenditure.
Link 1.3.2 — capital expenditure on non-current assets is then depreciated.

The two types of expenditure

Capital = buying/improving long-term assets; revenue = running the business day to day.

Capital expenditure is money spent on acquiring, improving or extending the life of a non-current asset — something that will benefit the business for more than one accounting period.

Examples: buying premises, machinery, vehicles; a major extension or upgrade that increases the asset's capacity or value.
Treatment: capitalised (added to the non-current asset in the statement of financial position) and then depreciated over its useful life.

Revenue expenditure is money spent on the day-to-day running of the business — its benefit is used up within the period.

Examples: repairs, maintenance, fuel, wages, rent, insurance, electricity, carriage on goods bought for resale.
Treatment: charged in full as an expense in the statement of profit or loss in the period it relates to.

The test: does the spending create or improve a long-term asset (capital), or does it simply keep the business running / maintain an asset at its current level (revenue)?

Capital: acquire/improve a non-current asset (benefit > 1 period) → SOFP, then depreciated.
Revenue: day-to-day running costs (benefit used up now) → SOPL expense.
Test: does it create/improve a long-term asset, or just keep things running?

See the full worked example for capital & revenue expenditure →

Costs of getting an asset ready for use

All costs needed to bring an asset into use are part of its capital cost.

A frequent exam point: the cost of a non-current asset is not just the purchase price. It includes all costs necessary to bring the asset into working condition for its intended use (consistent with IAS 16). These are all capital:

Delivery / carriage inwards on the asset.
Installation and assembly costs.
Legal fees on buying property.
Testing and modification to get it working.
Import duties and non-refundable taxes.

By contrast, costs incurred after the asset is in use are usually revenue:

Repairs, servicing, insurance, fuel, operator wages, and routine maintenance.

Example. A machine costs $40,000, with $2,000 delivery, $3,000 installation and $500 annual insurance. The capital cost is $45,000 (40,000 + 2,000 + 3,000); the $500 insurance is revenue (running cost), charged to the statement of profit or loss.

Capital cost = purchase price + all costs to get the asset ready for use.
Delivery, installation, legal fees, testing, import duties = capital.
Repairs, servicing, insurance, fuel, wages after use = revenue.
Depreciation is then based on the full capital cost.

See the full worked example for capital & revenue expenditure →

Repairs vs improvements (the borderline)

Maintaining an asset is revenue; enhancing it beyond its original state is capital.

The trickiest decisions are repairs vs improvements:

Repair / maintenance (revenue): restores the asset to its original condition or keeps it working — e.g. repainting, replacing a worn part, servicing.
Improvement / enhancement (capital): makes the asset better than before — increases its capacity, efficiency or useful life — e.g. adding an extension, upgrading an engine to increase output.

Mixed costs must be split: if a builder charges $30,000, of which $20,000 is a new extension (capital) and $10,000 is repairs to existing walls (revenue), the two parts are treated differently.

Materiality also applies: a low-value, long-life item (e.g. a $10 stapler) is usually expensed even though it lasts years, because capitalising it is not worth the effort.

Repair/maintenance restores or maintains → revenue.
Improvement increases capacity/efficiency/life → capital.
Split mixed costs into their capital and revenue parts.
Materiality: low-value long-life items are expensed.

Quick recap

Capital expenditure: acquire/improve a non-current asset → SOFP, then depreciated.
Revenue expenditure: day-to-day running cost → SOPL expense now.
An asset's capital cost includes all costs to bring it into use (delivery, installation, legal fees).
Repairs/maintenance = revenue; improvements that enhance the asset = capital.
Split mixed costs; apply materiality to low-value items.
Classification rests on the matching concept (benefit now vs over future periods).

Memorise this

Verbatim phrases and definitions Cambridge mark schemes credit.

Capital expenditure = acquiring/improving a non-current asset (benefit > 1 period) → SOFP, then depreciated.
Revenue expenditure = day-to-day running cost (benefit used up now) → SOPL expense.
Capital cost = purchase price + all costs to bring the asset into use.
Repairs = revenue; improvements = capital.

How it’s examined

Tested on Paper 1 (multiple choice classification) and Paper 2 (classify items; calculate the capital cost of an asset; explain the effect of misclassification — typically 2-6 marks, point-based). Examiner reports highlight treating delivery/installation as revenue and failing to split mixed repair/improvement costs.

Sources: Cambridge International AS & A Level Accounting 9706 syllabus (2026-2028); 9706 Paper 2 past papers & mark schemes, 2022-2024; 9706 Examiner Reports, 2022-2024. Last reviewed 2026-06-17.

Take this whole topic with you

Step-by-step worked examples — Capital & Revenue Expenditure

Step-by-step solutions to past-paper-style questions on capital & revenue expenditure, written exactly the way a tutor would explain them at the board.

Question type:

1Classify the expenditure (4 marks)
Getting startedIdentify & classify• 9706 Paper 1/2 style• capital, revenue, AO1
Question
Classify each as capital or revenue expenditure: (i) repairing the roof of the factory; (ii) buying a new delivery van; (iii) painting the new van's logo on it before use; (iv) annual road tax on the van. (4 marks)
Step-by-step solution
1. Step 1
  (i) Roof repair — maintains the asset → revenue.
2. Step 2
  (ii) New delivery van — acquiring a non-current asset → capital.
3. Step 3
  (iii) Logo before use — a cost of getting the van ready for use → capital.
4. Step 4
  (iv) Annual road tax — a running cost → revenue.
Answer
(i) Revenue; (ii) Capital; (iii) Capital; (iv) Revenue.
Examiner tip
Costs to bring the asset into use (the logo) are capital; recurring running costs (road tax) are revenue.
2Build the capital cost of an asset (5 marks)
Building confidenceMulti-step problem• capital cost, AO2
Question
A business buys a machine: list price $50,000 less 10% trade discount; delivery$ 1,500; installation $2,500; testing$ 800; first year's insurance $600. Calculate the amount capitalised as the cost of the machine. (5 marks)
Step-by-step solution
1. Step 1
  Purchase price = 50,000 − 10% = $45,000.
2. Step 2
  Add costs to bring into use: delivery 1,500 + installation 2,500 + testing 800 = 4,800.
3. Step 3
  Capital cost = 45,000 + 4,800 = $49,800.
4. Step 4
  Insurance $600 is a running cost (revenue) → charged to the statement of profit or loss, NOT capitalised.
Answer
Capitalised cost = $49,800 (insurance$ 600 is revenue).
Examiner tip
Deduct trade discount, add all costs to get the asset ready, exclude recurring costs like insurance.
3Split a mixed cost (5 marks)
Building confidenceMulti-step problem• improvement, repair, AO2
Question
A builder invoices $36,000:$ 25,000 for a new extension to the warehouse, $8,000 for repairs to existing walls, and$ 3,000 for repainting. State how each part is treated and the total capital and revenue amounts. (5 marks)
Step-by-step solution
1. Step 1
  Extension $25,000 — enhances the asset → capital.
2. Step 2
  Repairs $8,000 — restores existing walls → revenue.
3. Step 3
  Repainting $3,000 — maintenance → revenue.
4. Step 4
  Capital = $25,000; Revenue = $11,000 (8,000 + 3,000).
Answer
Capital $25,000 (extension); Revenue$ 11,000 (repairs + repainting).
Examiner tip
Mixed invoices must be split: only the part that enhances the asset is capitalised.
4Effect of treating capital as revenue (5 marks)
Building confidenceWord problem• effect, AO2
Question
A business wrongly charged the $20,000 cost of a new machine to repairs (an expense). Ignoring depreciation, explain the effect on the profit for the year and on the non-current assets. (5 marks)
Step-by-step solution
1. Step 1
  Expenses are overstated by $20,000 (repairs too high).
2. Step 2
  So profit is understated by $20,000.
3. Step 3
  The machine is missing from assets → non-current assets understated by $20,000.
4. Step 4
  Therefore capital/net assets are understated by $20,000 too.
5. Step 5
  (In later years, missing depreciation would partly offset this — but this year profit is understated.)
Answer
Profit understated $20,000; non-current assets (and net assets) understated$ 20,000.
Examiner tip
Treating capital as revenue understates profit and assets; the reverse error overstates both.
5Effect of treating revenue as capital (6 marks)
StretchWord problem• effect, depreciation, AO2
Question
A business wrongly capitalised a $9,000 repair by adding it to machinery, which is depreciated at 20% straight-line. Explain the effect on this year's profit and on net assets. (6 marks)
Step-by-step solution
1. Step 1
  The $9,000 repair (revenue) was not charged as an expense, so expenses are understated.
2. Step 2
  But depreciation on the extra $9,000 = 20% × 9,000 = $1,800 is now charged.
3. Step 3
  Net effect on expenses = −9,000 + 1,800 = −7,200, so profit is overstated by $7,200.
4. Step 4
  Machinery is overstated by 9,000 − 1,800 = $7,200 (cost added, less the extra depreciation).
5. Step 5
  So non-current assets / net assets are overstated by $7,200.
6. Step 6
  This is an error of principle — the trial balance still balances.
Answer
Profit overstated by $7,200 (9,000 not expensed, less 1,800 extra depreciation); net assets overstated by$ 7,200.
Examiner tip
Remember the knock-on depreciation when revenue is wrongly capitalised — it partly offsets the error.
6Carriage: capital or revenue? (4 marks)
Building confidenceIdentify & classify• carriage, AO2
Question
Classify each and state where it appears: (i) carriage inwards on goods bought for resale; (ii) carriage on a new machine being delivered. (4 marks)
Step-by-step solution
1. Step 1
  (i) Carriage inwards on goods for resale → revenue; added to cost of sales.
2. Step 2
  (ii) Carriage on a new machine → capital; added to the cost of the machine (non-current asset).
Answer
(i) Revenue — part of cost of sales; (ii) Capital — part of the machine's cost.
Examiner tip
Same word 'carriage', different treatment — it depends on what is being delivered (goods vs an asset).
7Classify a list of items (6 marks)
StretchIdentify & classify• classification, AO2
Question
Classify each as capital (C) or revenue (R): (i) legal fees on buying premises; (ii) redecorating the office; (iii) extending the car park; (iv) replacing a broken window; (v) wages of the firm's own staff who built a storage rack; (vi) fuel for delivery vehicles. (6 marks)
Step-by-step solution
1. Step 1
  (i) Legal fees on buying premises → C (cost of acquiring the asset).
2. Step 2
  (ii) Redecorating → R (maintenance).
3. Step 3
  (iii) Extending the car park → C (improvement).
4. Step 4
  (iv) Replacing a broken window → R (repair).
5. Step 5
  (v) Own staff wages building a rack → C (cost of creating a non-current asset).
6. Step 6
  (vi) Fuel → R (running cost).
Answer
(i) C; (ii) R; (iii) C; (iv) R; (v) C; (vi) R.
Examiner tip
Own labour used to construct a non-current asset is capitalised — a common trap (item v).
8Explain why the distinction matters (5 marks)
StretchWord problem• matching, AO3
Question
Explain, with reference to an accounting concept, why it is important to distinguish capital from revenue expenditure. (5 marks)
Step-by-step solution
1. Step 1
  Capital expenditure benefits the business over several periods; revenue expenditure benefits only the current period.
2. Step 2
  The matching concept requires costs to be charged to the periods that benefit.
3. Step 3
  So capital expenditure is capitalised and depreciated over its life, while revenue expenditure is charged in full now.
4. Step 4
  Misclassifying either one misstates profit (wrong expenses) and net assets (wrong asset values).
5. Step 5
  Correct classification gives a true and fair view of performance and position.
Answer
Matching requires costs to be charged to the periods benefiting; misclassification misstates profit and net assets, breaching the true and fair view.
Examiner tip
Name the matching concept and link misclassification to both profit and the statement of financial position.
9Capitalising own construction (6 marks)
StretchMulti-step problem• capital cost, AO2
Question
A business builds its own machine: materials $12,000; own workers' wages on the build$ 5,000; a $1,000 component bought specially;$ 400 of fuel used by delivery vans during the year. Calculate the cost to be capitalised. (6 marks)
Step-by-step solution
1. Step 1
  Materials $12,000 — part of building the asset → capital.
2. Step 2
  Own workers' wages on the build $5,000 → capital (cost of constructing the asset).
3. Step 3
  Special component $1,000 → capital.
4. Step 4
  Fuel $400 for delivery vans is unrelated running cost → revenue (exclude).
5. Step 5
  Capitalised cost = 12,000 + 5,000 + 1,000 = $18,000.
Answer
Capitalised cost = $18,000 (fuel$ 400 is revenue).
Examiner tip
Directly attributable construction costs (materials, labour, components) are capitalised; unrelated running costs are not.
10Borderline judgement (6 marks)
StretchWord problem• improvement, AO3
Question
A business spends $15,000 on its delivery fleet:$ 9,000 fitting more efficient engines that increase load capacity, and $6,000 servicing. Advise how each should be treated and justify your answer. (6 marks)
Step-by-step solution
1. Step 1
  Engines $9,000 increase the vehicles' capacity/efficiency → an improvement → capital.
2. Step 2
  Capitalise it and depreciate it over the remaining useful life.
3. Step 3
  Servicing $6,000 merely maintains the vehicles → revenue.
4. Step 4
  Charge the $6,000 to the statement of profit or loss now.
5. Step 5
  Justification: the engines bring benefit over future periods (capital, matched via depreciation); servicing's benefit is used up now (revenue).
6. Step 6
  Conclusion: $9,000 capital, $6,000 revenue — correct classification keeps profit and net assets true and fair.
Answer
Engines $9,000 = capital (improvement, depreciated); servicing$ 6,000 = revenue (maintenance, expensed now).
Examiner tip
Justify with the benefit-over-time principle (matching); the recommendation must explain why each part is treated as it is.

Model Answers — Capital & Revenue Expenditure

High-scoring sample answers for capital & revenue expenditure on the Cambridge IGCSE paper, with examiner-style notes mapping each response to the mark scheme and assessment objectives.

Question 1
9706 Paper 2 style2 marks
Q (2 marks). Define capital expenditure and give one example.
Model answer
Capital expenditure is expenditure on acquiring, improving or extending the life of a non-current asset, which benefits the business for more than one period. Example: buying a delivery vehicle (or the legal fees on purchasing premises).
Why this scores
Marking (point-based, 2). 1 mark for the definition, 1 for a valid example.
Question 2
9706 Paper 2 style4 marks
Q (4 marks). Classify each as capital or revenue expenditure: (a) installing a new air-conditioning system in the office; (b) cleaning the office windows; (c) legal fees on purchasing a building; (d) replacing a cracked window pane.
Model answer
(a) Capital (installing a new system — an improvement/addition). (b) Revenue (routine cleaning — running cost). (c) Capital (cost of acquiring the building). (d) Revenue (a repair).
Why this scores
Marking (point-based, 4). 1 mark each. A NEW system is capital; cleaning and pane-replacement are revenue.
Question 3
9706 Paper 2 style5 marks
Q (5 marks). A company buys equipment: list price $30,000 less 5% trade discount; delivery$ 900; installation $1,600; one year's maintenance contract$ 1,200. Calculate the amount to be capitalised.
Model answer
Purchase price = 30,000 − 5% = $28,500. Add costs to bring into use: delivery 900 + installation 1,600 = 2,500. Capitalised cost = 28,500 + 2,500 = $31,000.

The $1,200 maintenance contract is a running cost (revenue) — charged to the statement of profit or loss, not capitalised.
Why this scores
Marking (point-based, 5). Trade discount → $28,500 (1); add delivery (1) + installation (1); capitalised$ 31,000 (1); exclude maintenance as revenue (1).
Question 4
9706 Paper 2 style6 marks
Q (6 marks). A garage invoices a haulage business $42,000:$ 28,000 for fitting larger, more powerful engines that increase each lorry's load capacity, $10,000 for replacing worn tyres and brakes, and$ 4,000 for servicing. State the treatment of each amount and the totals to be capitalised and expensed, with a reason.
Model answer
Engines $28,000 — capital. They increase the load capacity of the lorries (an improvement beyond their original state), bringing benefit over future periods.

Tyres and brakes $10,000 — revenue. This restores the lorries to working order (a repair/maintenance).

Servicing $4,000 — revenue. Routine maintenance.

Totals: capitalise $28,000 (depreciated over the lorries' remaining life); expense $14,000 (10,000 + 4,000) in the statement of profit or loss.

Reason: the engines enhance the asset (capital, matched via depreciation); the repairs and servicing merely maintain it (revenue, charged now).
Why this scores
Marking (point-based, 6). Correct treatment of each item (3); correct totals capital $28,000 / revenue$ 14,000 (2); reason linking to enhancement vs maintenance (1).
Question 5
9706 Paper 2/3 style6 marks
Q (6 marks). A business wrongly recorded the $24,000 cost of a new machine as a repair expense. The machine should have been depreciated at 25% straight-line. Explain the effect of this error on (a) the profit for the year and (b) the non-current assets at the year end.
Model answer
(a) Profit. The $24,000 should have been capitalised, so charging it to repairs overstated expenses — but no depreciation was charged either. Correctly, only depreciation of 25% × 24,000 = $6,000 should have been an expense. So expenses were overstated by 24,000 − 6,000 = $18,000, meaning profit was understated by $18,000.

(b) Non-current assets. The machine was omitted from assets. It should appear at cost less depreciation = 24,000 − 6,000 = $18,000. So non-current assets (and net assets) were understated by $18,000.
Why this scores
Marking (point-based, 6). Recognise it should be capital + depreciated (1); correct depreciation $6,000 (1); profit understated$ 18,000 with working (2); assets understated $18,000 (2).
Question 6
9706 Paper 3 style6 marks
Q (6 marks). Explain, with reference to accounting concepts, why the correct distinction between capital and revenue expenditure is important for the reliability of the financial statements.
Model answer
Matching (accruals) concept. Capital expenditure benefits the business over several periods, so its cost should be spread (as depreciation) over those periods. Revenue expenditure's benefit is used up now, so it is charged in full this period. Correct classification ensures each period's profit reflects the costs that truly relate to it.

Effect on the statements. If capital is treated as revenue, profit and net assets are understated; if revenue is treated as capital, profit and net assets are overstated. Either way the statement of profit or loss and the statement of financial position are misstated.

True and fair view. Because users (owners, lenders, investors) rely on these statements to make decisions, misclassification would mislead them. Correct classification therefore supports a true and fair view and the reliability of the accounts.
Why this scores
Marking (point-based, ~6). Matching explained (~2); effect on profit and net assets both ways (~2); link to true and fair view / user decisions (~2).
Question 7
9706 Paper 3 style7 marks
Q (7 marks). A business capitalised a $12,000 repair by adding it to its buildings (depreciated at 2% per year on cost). (a) State the type of error. (b) Calculate the effect on the profit for the year. (c) Calculate the effect on net assets at the year end.
Model answer
(a) It is an error of principle (revenue expenditure treated as capital). The trial balance still balances.

(b) Profit. The $12,000 repair was not expensed (expenses too low), but extra depreciation of 2% × 12,000 = $240 was charged. Net understatement of expenses = 12,000 − 240 = $11,760, so profit is overstated by $11,760.

(c) Net assets. Buildings are overstated by 12,000 − 240 = $11,760 (the cost added, less the extra depreciation), so net assets are overstated by $11,760.
Why this scores
Marking (point-based, 7). Error of principle (1); extra depreciation $240 (1); profit overstated$ 11,760 with working (2.5); net assets overstated $11,760 (2.5). The knock-on depreciation is the key subtlety.
Question 8
9706 Paper 2 style4 marks
Q (4 marks). Explain why carriage paid on delivering a newly purchased machine is treated differently from carriage paid on goods bought for resale.
Model answer
Carriage on a newly purchased machine is a cost of bringing a non-current asset into use, so it is capital expenditure — added to the cost of the machine and depreciated over its life.

Carriage on goods bought for resale (carriage inwards) is a cost of the goods that will be sold this period, so it is revenue expenditure — added to cost of sales in the statement of profit or loss.

The difference arises because one cost relates to a long-term asset and the other to goods consumed within the period (the matching concept).
Why this scores
Marking (point-based, 4). Carriage on the machine = capital/part of cost (~2); carriage on goods = revenue/cost of sales (~2). Linking to matching strengthens the answer.
Question 9
9706 Paper 2 style5 marks
Q (5 marks). A business uses its own employees and materials to build a storage mezzanine: materials $14,000, employees' wages for the build$ 6,000, and hire of special lifting equipment $2,000. The factory's normal electricity bill for the year was$ 9,000. Calculate the cost to be capitalised and state how the electricity is treated.
Model answer
Capitalised cost = materials 14,000 + build wages 6,000 + equipment hire 2,000 = $22,000 — all are directly attributable to constructing the mezzanine (a non-current asset).

The electricity $9,000 is a general running cost (revenue) — charged to the statement of profit or loss, not capitalised.
Why this scores
Marking (point-based, 5). Materials (1) + wages (1) + equipment hire (1) capitalised; total $22,000 (1); electricity treated as revenue (1).
Question 10
9706 Paper 3 evaluation style6 marks
Q (6 marks). The owner of a business wants to capitalise as much expenditure as possible 'to make the profit look higher'. Discuss whether this is acceptable.
Model answer
Why it would raise profit. Capitalising expenditure removes it from expenses, so in the short term profit and net assets appear higher — which is what the owner wants.

Why it is not acceptable.

Expenditure must be classified by its nature, not by the profit the owner desires. Only spending that acquires or improves a non-current asset is genuinely capital.

Treating revenue expenditure as capital overstates profit and assets, breaching the matching concept and prudence (overstating profit/assets).

It gives a misleading, untrue and unfair view, deceiving lenders, investors and tax authorities — which is unethical (links to 3.2).

The overstatement also reverses over time as the wrongly-capitalised amounts are depreciated.

Conclusion. The classification must follow the substance of the expenditure, not the owner's wish to flatter profit. Deliberately misclassifying to inflate profit is not acceptable and undermines the reliability and integrity of the financial statements.
Why this scores
Marking (point-based, ~6). Recognise the short-term profit effect (~1); explain why classification follows nature, breaching matching/prudence/true-and-fair (~3); ethical dimension (~1); supported conclusion (~1).

Key Definitions and Keywords — Capital & Revenue Expenditure

Definitions to memorise and the exact keywords mark schemes credit for capital & revenue expenditure answers — sharpened from recent examiner reports for the 2026 Cambridge IGCSE sitting.

Capital expenditure
Examiner keyword
Expenditure on acquiring, improving or extending the life of a non-current asset; capitalised in the statement of financial position and depreciated.
Revenue expenditure
Examiner keyword
Expenditure on the day-to-day running of the business, whose benefit is used up within the period; charged as an expense in the statement of profit or loss.
Cost of a non-current asset
Examiner keyword
The purchase price plus all costs of bringing the asset into working condition for its intended use (delivery, installation, legal fees, testing).
Improvement (enhancement)
Expenditure that increases an asset's capacity, efficiency or useful life beyond its original state; treated as capital.
Repair / maintenance
Expenditure that restores or maintains an asset at its existing standard; treated as revenue.
Carriage inwards
Delivery cost of goods bought; on goods for resale it is revenue (part of cost of sales); on a non-current asset it is capital.
Matching (link)
Examiner keyword
The concept requiring costs to be charged to the periods that benefit — the reason capital expenditure is depreciated rather than expensed at once.
Error of principle (link)
Examiner keyword
Misclassifying capital as revenue (or vice versa) is an error of principle; the trial balance still balances but profit and net assets are misstated.

Common Mistakes and Misconceptions — Capital & Revenue Expenditure

The traps other students keep falling into on capital & revenue expenditure questions — taken from recent Cambridge IGCSE examiner reports and mark schemes — and how to avoid them.

✕Treating delivery/installation of an asset as revenue
9706 Examiner Reports
Why it happens
They look like running costs.
How to avoid it
Costs to bring an asset into use (delivery, installation, legal fees, testing) are CAPITAL — part of the asset's cost.
✕Not splitting a mixed repair/improvement invoice
9706 Examiner Reports
Why it happens
Treating the whole invoice one way.
How to avoid it
Split the cost: the part that enhances the asset is capital; the part that repairs/maintains is revenue.
✕Treating all carriage inwards the same
9706 Examiner Reports
Why it happens
Same term used for goods and assets.
How to avoid it
Carriage on goods for resale = revenue (cost of sales); carriage on a non-current asset = capital (part of its cost).
✕Forgetting the knock-on depreciation when revenue is wrongly capitalised
9706 Examiner Reports
Why it happens
Only adjusting the expense.
How to avoid it
When revenue is capitalised, the asset is also over-depreciated; the net profit error = the amount less the extra depreciation.
✕Not capitalising own labour used to build an asset
9706 Examiner Reports
Why it happens
Wages are normally an expense.
How to avoid it
Wages and materials used to CONSTRUCT a non-current asset are capitalised as part of its cost.
✕Getting the direction of the profit effect wrong
9706 Examiner Reports
Why it happens
Not tracing through expenses and assets.
How to avoid it
Capital treated as revenue → expenses up → profit DOWN, assets DOWN. Revenue treated as capital → expenses down → profit UP, assets UP.

Capital & Revenue Expenditure

Detailed Study Notes

At a glance

What you’ll learn

Quick recap

Memorise this

How it’s examined

Take this whole topic with you

1Classify the expenditure (4 marks)

2Build the capital cost of an asset (5 marks)

3Split a mixed cost (5 marks)

4Effect of treating capital as revenue (5 marks)

5Effect of treating revenue as capital (6 marks)

6Carriage: capital or revenue? (4 marks)

7Classify a list of items (6 marks)

8Explain why the distinction matters (5 marks)

9Capitalising own construction (6 marks)

10Borderline judgement (6 marks)

Capital expenditure

Revenue expenditure

Cost of a non-current asset

Improvement (enhancement)

Repair / maintenance

Carriage inwards

Matching (link)

Error of principle (link)

✕Treating delivery/installation of an asset as revenue

✕Not splitting a mixed repair/improvement invoice

✕Treating all carriage inwards the same

✕Forgetting the knock-on depreciation when revenue is wrongly capitalised

✕Not capitalising own labour used to build an asset

✕Getting the direction of the profit effect wrong