Capital, Revenue and Deferred Revenue Expenditure (ICSE Class 10 Commercial Studies)
Updated 17 October 2026 · Fact-checked
Capital expenditure buys or improves fixed assets whose benefit lasts more than one year and is shown in the Balance Sheet. Revenue expenditure runs the business or keeps assets in working order, benefits only the current year and is charged to the Trading or Profit and Loss Account. Deferred revenue expenditure is a large revenue expense whose benefit spreads over several years, so it is written off gradually.
Understand Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure
1. The one test
Ask two questions about any payment. (i) Does it buy a fixed asset, or add to its value or earning power? (ii) Will its benefit last beyond the current accounting year? If both answers are yes it is capital expenditure; if it only keeps the business running this year, it is revenue expenditure.
2. Capital expenditure
Money spent to acquire a fixed asset or to improve it so that the business benefits for several years.
- Non-recurring; increases earning capacity; shown on the assets side of the Balance Sheet.
- Examples: purchase of land, building, machinery, furniture or a vehicle; cost of erecting or installing a new machine (freight, cartage, installation, wages for erection); the repairs needed to make a second-hand machine fit for use; extension of a building; purchase of a patent or goodwill.
3. Revenue expenditure
Money spent in the day-to-day running of the business or to maintain assets in working order, whose benefit is exhausted in the current year.
- Recurring; only maintains earning capacity; debited to the Trading or Profit and Loss Account.
- Examples: purchase of goods for resale, wages, salaries, rent, electricity, carriage inwards and outwards on goods, ordinary advertising, insurance premium, repairs and maintenance of existing assets, interest on loans, depreciation.
4. Deferred revenue expenditure
A revenue expense that is so large and whose benefit is so long-lasting that it is not charged entirely to the year in which it is spent. It is spread over the years that benefit; the part not yet written off is shown as an asset in the Balance Sheet.
- Revenue in nature (no fixed asset is bought), capital-like in its length of benefit.
- Examples: a heavy advertising campaign to launch a new product, large research and development expenses, heavy expenses of shifting the business to a new location.
5. Capital and revenue receipts
- Capital receipts: not part of normal trading income; they create a liability or reduce an asset. Examples: capital brought in by the owner, a bank loan taken, sale of old machinery or land, issue of shares or debentures.
- Revenue receipts: come from regular operations, create no liability and reduce no asset. Examples: sale of goods, commission received, interest received, rent received, discount received.
6. Comparison
| Basis | Capital expenditure | Revenue expenditure |
|---|---|---|
| Purpose | Acquire or improve a fixed asset | Run the business, maintain assets |
| Benefit | More than one year | Current year |
| Frequency | Non-recurring | Recurring |
| Shown in | Balance Sheet (asset) | Trading or Profit and Loss Account |
| Effect on current profit | None directly (only through depreciation) | Reduces profit in full |
7. Traps
The same item can be capital or revenue by purpose. A car bought by a car dealer for resale is purchases (revenue); the same car bought for the manager is a vehicle (capital). Repairs on a second-hand asset before first use are capital; later repairs are revenue.
Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure: key facts
- Capital expenditure
- Buys or improves a fixed asset
- Benefit beyond one year
- Balance Sheet
- Non-recurring.
- Revenue expenditure
- Runs the business or maintains assets
- Benefit in current year
- Trading or P&L Account
- Recurring.
- Deferred revenue expenditure
- Large revenue expense
- Benefit over several years
- Written off gradually
- Unwritten part is shown as an asset.
- Cost of an asset
- Purchase price + Carriage + Installation + Erection wages | All are capital
- Amount debited to the asset account.
How to answer Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure questions
Expect classification of given items, short differences, receipts, and a sum finding the amount of capital expenditure.
- 1Underline the purpose of each payment: buying an asset or running the business.
- 2Include every cost of acquiring and installing a new asset in capital expenditure.
- 3Treat later maintenance and repairs as revenue.
- 4Total capital items and revenue items separately and check that they add to the total spent.
Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure 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.
Capital versus revenue
Suppose a bakery buys an oven for ₹1,50,000 and pays ₹5,000 to have the oven connected, and a year later pays ₹2,000 for servicing it.
Classify the three payments.
Try it first, then show the solutionSolution
- The oven is a fixed asset: capital.
- Connection charges are needed to bring the new oven into use: capital.
- Servicing keeps it working: revenue.
Answer: ₹1,55,000 is capital expenditure and ₹2,000 is revenue expenditure.
Memory hook: Get it ready: capital. Keep it going: revenue.
Deferred revenue expenditure
Imagine a firm that spends ₹6,00,000 on a launch campaign for a new product that it expects to help sales for three years.
Why is the campaign not charged wholly to this year's profit?
Try it first, then show the solutionSolution
- It is revenue in nature, but the benefit extends to three years.
- It is spread over the years of benefit.
Answer: It is deferred revenue expenditure, written off over the years that benefit.
Memory hook: Spent once, enjoyed for years, so paid off slowly.
Tricks to remember Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure
Short memory aids. Say each one aloud once, then use it on a question the same day.
Ready or running
Money to get an asset ready for use is capital; money to keep it running is revenue.
Use it when: Repairs, installation, freight.
Receipts test
If receiving the money creates a liability or removes an asset, it is a capital receipt.
Use it when: Loan, sale of machinery, capital introduced.
Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure: solved examples
Ordered from board level to HOTS. Try each one before you open the solution.
Example 1: Identify the type · 1 mark · MCQBoard level
Wages paid to workers for erecting a newly purchased machine are:
(a) revenue expenditure
(b) capital expenditure
(c) deferred revenue expenditure
(d) revenue receipt
Try it first, then show the solutionSolution
- Cost of putting a new fixed asset in working condition is part of its cost.
Answer: (b)
Example 2: Define with example · 2 marks · Very short answerBoard level
Explain deferred revenue expenditure with one example and say how its unwritten part is shown.
Try it first, then show the solutionSolution
- A revenue expense that is large and whose benefit lasts for several years, so it is written off over those years.
- Example: heavy advertising to launch a new product.
- The part not yet written off is carried forward and shown as an asset on the Balance Sheet.
Answer: A heavy revenue expense benefiting several years, written off gradually; for example, a heavy launch advertising campaign. The part not yet written off is carried forward and shown as an asset on the Balance Sheet.
Example 3: Classify and total · 4 marks · Short answerHarder board level
Suppose a trader spends: machinery ₹2,50,000; carriage on the machinery ₹6,000; installation charges ₹14,000; wages for erecting the machine ₹7,500; annual repairs of old furniture ₹9,000; purchase of goods ₹80,000. Find the total capital expenditure and the total revenue expenditure.
Try it first, then show the solutionSolution
- Capital items: 2,50,000 + 6,000 + 14,000 + 7,500 = ₹2,77,500 (cost of the machine).
- Revenue items: 9,000 + 80,000 = ₹89,000.
- Check: 2,77,500 + 89,000 = 3,66,500, equal to the total of all six payments.
Answer: Capital expenditure ₹2,77,500; revenue expenditure ₹89,000.
Example 4: Second-hand machine · 4 marks · Short answerHarder board level
Suppose a firm buys a second-hand machine for ₹1,20,000, spends ₹15,000 on repairs to make it fit for use, and two years later pays ₹3,000 for repainting. At what value is the machine recorded, and how is the later payment treated? Give reasons.
Try it first, then show the solutionSolution
- Repairs before first use are needed to bring the machine into working condition, so they are part of its cost.
- Cost = 1,20,000 + 15,000 = ₹1,35,000 (capital).
- The ₹3,000 repainting later only maintains it: revenue, charged to the Profit and Loss Account.
Answer: Machine recorded at ₹1,35,000; ₹3,000 is revenue expenditure.
Example 5: Launch campaign · 6 marks · Case-basedHOTS / competency
Suppose a company spends ₹6,00,000 on a launch campaign and expects benefit for three years. (a) Name the type of expenditure and justify. (b) Assuming equal write-off, how much is charged to profit each year and what balance remains at the end of year 1? (c) How would the treatment differ for an ordinary monthly advertisement of ₹20,000?
Try it first, then show the solutionSolution
- (a) Deferred revenue expenditure: revenue in nature, no asset bought, but benefit lasts several years.
- (b) Assumption: equal write-off over 3 years. Each year 6,00,000 / 3 = ₹2,00,000. Balance after year 1 = 6,00,000 - 2,00,000 = ₹4,00,000, shown as an asset in the Balance Sheet.
- (c) An ordinary advertisement benefits the current year only: revenue expenditure charged in full to the Profit and Loss Account.
Answer: (a) Deferred revenue expenditure; (b) ₹2,00,000 a year, ₹4,00,000 carried forward; (c) ordinary advertising is wholly revenue.
Where students lose marks in Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure
The slips examiners see most often, and what to write instead.
Mistake: Treating installation and carriage on a new asset as revenue
Students see "carriage" and think of goods.
Wrong working
Carriage on new machine: revenue expenditure.
Right working
Carriage on a new machine is part of its cost: capital expenditure.
Do this: Ask whether the item is needed to bring the asset into use.
Usually costs: 1-2 marks.
Mistake: Classifying only by the item, not the purpose
The same item can be stock or an asset.
Wrong working
A vehicle is always capital.
Right working
A vehicle bought by a dealer for resale is purchases (revenue); for use in the business it is capital.
Do this: Read who is buying and why.
Usually costs: 1-2 marks.
Mistake: Calling a loan taken a revenue receipt
It brings in money, so it feels like income.
Wrong working
Bank loan: revenue receipt.
Right working
A loan creates a liability and is a capital receipt.
Do this: Receipts that create a liability or reduce an asset are capital.
Usually costs: 1 mark.
Mistake: Writing "capital is large and revenue is small"
Size is not the test.
Wrong working
Capital expenditure is big and revenue expenditure is small.
Right working
Capital expenditure buys or improves an asset with benefit beyond a year; revenue expenditure runs the business with benefit in the current year.
Do this: Use purpose and period of benefit.
Usually costs: 1-2 marks.
Exam tips
- For a distinction, give at least four bases on the same lines in full sentences.
- In classification lists, add the head (capital or revenue) and a short reason for each item.
- For deferred revenue expenditure always say "revenue in nature but benefit for several years".
- Remember the unwritten part of deferred revenue expenditure is shown as an asset in the Balance Sheet.
Practice questions on Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure
Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.
Q1 · 2 marks · Very short answerBoard level
Give two examples each of capital receipts and revenue receipts.
Hint
Loan versus commission.
Answer
Capital receipts: loan from a bank; sale of old machinery. Revenue receipts: sale of goods; commission received.
Q2 · 4 marks · Short answerHarder board level
Suppose a car dealer buys a car for ₹6,00,000 to resell, and a manufacturer buys an identical car for the manager's use. Explain how the two payments are classified.
Hint
Purpose decides.
Answer
For the dealer the car is stock-in-trade bought for resale: it is purchase of goods, a revenue expenditure charged to the Trading Account. For the manufacturer it is a fixed asset used in the business for years: capital expenditure shown in the Balance Sheet. The nature of the item is the same, but the purpose of buying differs.
Q3 · 4 marks · Short answerHarder board level
Suppose a firm pays ₹40,000 to extend its factory building and ₹6,000 to repair a leaking roof of the same building. Classify each and state the effect of each on the current year's profit.
Hint
Extension adds; repair maintains.
Answer
The extension of ₹40,000 adds to the building and is capital expenditure: shown as an asset, with no direct reduction of this year's profit (only through depreciation). The roof repair of ₹6,000 only maintains the building and is revenue expenditure, charged to the Profit and Loss Account, which reduces profit by ₹6,000.
Q4 · 4 marks · Short answerHarder board level
Suppose a firm spends ₹50,000 on a new machine and ₹50,000 on wages in the same year. Explain, with the effect on profit for the year, why one is not charged in full to the Profit and Loss Account but the other is.
Hint
Which one gives a benefit beyond the year?
Answer
The machine is capital expenditure: its benefit lasts several years, so it is shown as an asset and only depreciation reaches the Profit and Loss Account each year. The wages are revenue expenditure: the benefit is used up in the year, so the whole ₹50,000 is charged and reduces profit by that amount.
Q5 · 4 marks · Case-basedHOTS / competency
Suppose an accountant debits the ₹50,000 cost of a new computer to the Profit and Loss Account as "office expenses". Explain the error and its effect on profit and on the Balance Sheet.
Hint
Which side should it appear on?
Answer
The computer is a fixed asset that will serve for several years, so the payment is capital expenditure. Charging it entirely to the Profit and Loss Account understates the year's profit by ₹50,000 (before any depreciation) and leaves the asset out of the Balance Sheet, so assets are understated. It should be shown as an asset, with only depreciation charged to profit each year.
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.Where is capital expenditure shown?Show answer
On the assets side of the Balance Sheet.
2.A bank lends money to the firm: what kind of receipt is this?Show answer
A capital receipt, because it creates a liability.
3.Give one example of deferred revenue expenditure.Show answer
Heavy launch advertising of a new product.
4.Are later repairs of an old machine capital or revenue?Show answer
Revenue expenditure.
5.Is commission received a capital or revenue receipt?Show answer
A revenue receipt.
Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure: frequently asked questions
Is depreciation capital or revenue?
Depreciation is a revenue expense charged to the Profit and Loss Account; the purchase of the asset is capital.
Why is deferred revenue expenditure not simply capital?
Because no fixed asset is bought; the expense is revenue in nature, only its benefit lasts longer.
Can the same payment be capital for one firm and revenue for another?
Yes, depending on purpose, as with a car bought by a dealer for resale and by a firm for use.