AccountancyCBSE Class 11 · Financial Statements - I

Capital and Revenue Expenditure and Receipts Class 11: Classification and Effect on Profit

Updated 17 October 2026 · Fact-checked

Capital expenditure gives benefit over more than one accounting year and is shown as an asset; revenue expenditure is incurred for running the business and is charged to the Profit and Loss Account of the year. Deferred revenue expenditure is revenue in nature but its benefit extends over several years, so it is written off over those years. Capital receipts add to capital or liabilities or sell assets; revenue receipts arise from normal business.

Ask how long the benefit lasts: over one year is capital, within the year is revenue; deferred revenue is written off a part each year.

Illustration drawn for QuestionBuddy.

Understand Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts

Tests of classification. (1) How long is the benefit? More than one year: capital; within the year: revenue. (2) Is it for acquiring or improving a fixed asset or a business? Capital. (3) Is it for running or maintaining the business? Revenue. (4) Does it increase earning capacity permanently? Capital.

Capital expenditure examples. Purchase of land, machinery or furniture; legal fees for buying land; carriage and installation on machinery; wages for installing machinery; repairs to put a second-hand machine into usable condition; additions that extend the life.

Revenue expenditure examples. Wages, salaries, rent, carriage on goods, repairs and maintenance, insurance of assets, depreciation, interest on loan, advertisements for the year, cost of goods sold.

Deferred revenue expenditure. A heavy spend such as a large advertising campaign that benefits several years: shown as an asset (part not yet written off) and written off over its useful years. Example: ₹1,50,000 over 5 years: ₹30,000 charged each year; the balance of ₹1,20,000 is shown in the balance sheet after year 1.

Receipts. *Capital receipts*: capital introduced, loans raised, sale of fixed assets, issue of shares. *Revenue receipts*: sale of goods, interest, commission, rent received. The profit or loss on the sale of a fixed asset is revenue (gain or loss), but the sale proceeds are a capital receipt.

Effect of wrong classification. Capital treated as revenue: profit understated, asset understated. Revenue treated as capital: profit overstated, asset overstated. Remember to adjust depreciation on a capital item wrongly expensed.

Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts: key facts

Capital expenditure: Benefit beyond one year
Acquires or improves a fixed asset
Shown as an asset
Not charged fully to profit; Includes carriage and installation.
Revenue expenditure: Benefit within the year
Running costs and maintenance
Charged to Profit and Loss
Includes depreciation; Matched with revenue.
Deferred revenue expenditure: Revenue in nature
Benefit over several years
Written off equally over those years
Balance is an asset; Example: heavy advertising.
Effect of misclassification: Capital as revenue: profit understated | Revenue as capital: profit overstated; Adjust depreciation too.

How to answer Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts questions

Classification questions test reasons as much as answers.

1For every item ask: for acquiring an asset or for running the business?
2Check how long the benefit lasts.
3Add costs incurred to bring an asset to working condition to its cost.
4For deferred items, spread equally over the years of benefit.
5For profit effect, correct each item and add depreciation where needed.

Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Repairs before use

Suppose a workshop buys a second-hand lathe for ₹80,000 and spends ₹10,000 on repairs to make it usable.

How is the ₹10,000 treated?

Try it first, then show the solutionSolution

The repairs were needed to bring the machine into working condition.
They are part of the cost of the asset.

Answer: Capital expenditure; the machine is capitalised at ₹90,000.

Memory hook: Spent to make it ready: add to cost.

Tricks to remember Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts

Short memory aids. Say each one aloud once, then use it on a question the same day.

Ready, add to cost
Anything spent to bring an asset to working condition is capital.
Use it when: Capital items.
Year, charge it
If the benefit is used up within the year, charge it to profit.
Use it when: Revenue items.

Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Which is capital? · 1 mark · MCQBoard level

Which of the following is capital expenditure?
(a) Wages paid to workers on production
(b) Carriage paid on goods purchased
(c) Wages paid for installing a new machine
(d) Insurance premium for the year

Try it first, then show the solutionSolution

Installation brings the asset into use.

Answer: (c) Wages paid for installing a new machine

Example 2: Classify with reasons · 4 marks · Short answerBoard level

Classify as capital or revenue with a reason: (i) legal fees for the purchase of land; (ii) petrol for a delivery van; (iii) repairs to a machine at the time of purchase to make it usable; (iv) sale proceeds of an old machine. (4 marks)

Try it first, then show the solutionSolution

(i) Capital expenditure: part of the cost of land.
(ii) Revenue expenditure: used within the year.
(iii) Capital expenditure: needed to make the asset ready for use.
(iv) Capital receipt: sale of a fixed asset.

Answer: (i) capital (ii) revenue (iii) capital (iv) capital receipt

Example 3: Corrected profit · 5 marks · Short answerHarder board level

The profit shown by the books is ₹3,50,000. It is found that (i) a machine costing ₹2,00,000 bought at the start of the year was debited to Purchases (depreciation 10% on cost is to be charged); (ii) repairs of ₹15,000 were debited to Machinery; (iii) an advertising campaign of ₹90,000, whose benefit lasts 3 years, was fully charged to profit in the year. Find the corrected profit. (5 marks)

Try it first, then show the solutionSolution

(i) Profit rises by 2,00,000 and falls by depreciation 20,000: net +1,80,000.
(ii) Repairs are revenue: profit falls by 15,000.
(iii) Only 90,000 ÷ 3 = 30,000 belongs to this year: profit rises by 60,000; ₹60,000 is carried as deferred revenue expenditure.
Corrected profit = 3,50,000 + 2,00,000 − 20,000 − 15,000 + 60,000 = ₹5,75,000.

Answer: Corrected profit ₹5,75,000.

Example 4: Nature of receipts · 4 marks · Short answerHarder board level

Classify as capital or revenue receipts and say whether they appear in the Profit and Loss Account: (i) additional capital ₹50,000 brought in; (ii) interest received on investments ₹6,000; (iii) loan taken from the bank ₹2,00,000; (iv) old machinery (book value ₹60,000) sold for ₹75,000. (4 marks)

Try it first, then show the solutionSolution

(i) Capital receipt; not in P&L.
(ii) Revenue receipt; credited to P&L.
(iii) Capital receipt; a liability, not in P&L.
(iv) The ₹75,000 is a capital receipt; the profit of ₹15,000 (75,000 − 60,000) is a gain credited to P&L.

Answer: Only (ii) and the ₹15,000 gain on (iv) appear in P&L.

Example 5: Deferred revenue expenditure · 4 marks · Short answerHOTS / competency

A firm spent ₹1,50,000 on an advertising campaign for a new product. The benefit is expected for 5 years. Show the charge for the first year and the balance sheet figure at the end of the first and second years. What error arises if the whole amount is charged in year 1? (4 marks)

Try it first, then show the solutionSolution

Charge per year = 1,50,000 ÷ 5 = ₹30,000.
End of year 1: unwritten balance 1,20,000. End of year 2: 90,000.
If all is charged in year 1, year 1 profit is understated by 1,20,000, and later years' profits are overstated by 30,000 each, so profits of different years are not fairly matched with the benefit.

Answer: Charge ₹30,000 a year; balance ₹1,20,000 then ₹90,000; full write-off understates year 1 profit by ₹1,20,000.

Where students lose marks in Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts

The slips examiners see most often, and what to write instead.

Mistake: Charging installation wages to Wages
Not recognising capital cost.
Wrong working
Wages A/c Dr 6,000.
Right working
Machinery A/c Dr 6,000.
Do this: Cost of making the asset ready is capital.
Usually costs: 1 mark
Mistake: Calling the sale proceeds a revenue receipt
Mixing the sale price with the gain.
Wrong working
Sale proceeds ₹75,000: revenue receipt.
Right working
Proceeds are capital; only the profit over book value goes to P&L.
Do this: Split the proceeds and the gain.
Usually costs: 1 mark
Mistake: Ignoring depreciation when correcting an expensed asset
Capitalising the item but leaving out the depreciation.
Wrong working
Profit +2,00,000.
Right working
Profit +2,00,000 − 20,000 = +1,80,000.
Do this: Capital items are depreciated.
Usually costs: 1 mark

Exam tips

Always write the reason beside capital or revenue.
Mention the duration of the benefit.
For deferred revenue expenditure, show the yearly charge and the carried-forward balance.
Do not forget depreciation on corrected capital items.

Practice questions on Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
Deferred revenue expenditure is:
(a) capital expenditure
(b) revenue expenditure whose benefit extends over more than one year
(c) a capital receipt
(d) an unproductive expense
Hint
Revenue by nature.
Answer
(b) revenue expenditure whose benefit extends over more than one year
Q2 · 3 marks · Short answerHarder board level
A heavy advertising campaign cost ₹1,20,000 with a benefit for 4 years. Find the charge for year 1 and the amount carried forward at the end of years 1 and 2. (3 marks)
Hint
Equal yearly write-off.
Answer
Yearly charge = 1,20,000 ÷ 4 = ₹30,000. Carried forward: year 1 end ₹90,000; year 2 end ₹60,000.
Q3 · 3 marks · Short answerHarder board level
State, with reasons, whether each is capital or revenue: (i) wages ₹5,000 paid for erecting machinery; (ii) legal fees ₹2,000 for registering title of a building; (iii) dismantling and removal cost ₹1,500 for shifting the old machine within the factory. (3 marks)
Hint
Does it bring an asset into use?
Answer
(i) Capital: part of the cost of the machine. (ii) Capital: legal cost of acquiring the building. (iii) Revenue, since moving an existing machine does not add a new asset or extend life (unless it increases capacity).
Q4 · 1 mark · Assertion-reasonHarder board level
Assertion (A): A loan raised from a bank is a capital receipt.
Reason (R): It increases liabilities and does not arise from the normal business activity.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Source of funds.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q5 · 4 marks · Short answerHOTS / competency
A firm sold old machinery of book value ₹60,000 for ₹48,000 and used the proceeds, plus ₹90,000 from a bank loan, to buy new machinery. Find the loss on the sale, classify each cash flow as capital or revenue, and say which of them reaches the Profit and Loss Account. (4 marks)
Hint
Loss is revenue.
Answer
Loss = 60,000 − 48,000 = ₹12,000 (charged to P&L). Capital receipts: sale proceeds ₹48,000 and loan ₹90,000. Capital expenditure: purchase of new machinery (₹1,38,000 if the full amount is spent). Only the loss of ₹12,000 reaches the P&L.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Capital expenditure benefits?Show answer
More than one accounting year.
2.Where is revenue expenditure charged?Show answer
Profit and Loss Account.
3.Is the profit on sale of a machine capital?Show answer
The proceeds are capital; the profit is revenue.
4.Is depreciation capital or revenue?Show answer
Revenue expense.
5.What is deferred revenue expenditure?Show answer
Revenue expense with benefit over several years.

Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts: frequently asked questions

Is a loan a revenue receipt?

No; it is a capital receipt.

How is an expensed machine corrected?

Capitalise it and charge depreciation.

Why is deferred revenue expenditure shown as an asset?

Part of its benefit is yet to come.