Capital and Revenue Expenditure and Receipts: ISC Class 11 Notes

What Capital and Revenue Expenditure and Receipts is about

Weightage: Capital and Revenue Expenditure and Receipts belongs to the unit Final Accounts, which CISCE weights at 14 of the 80 marks in the ISC Class XI Accountancy Paper I (Theory). Class XI is examined by the school, so your school sets the paper within this weightage.Source: CISCE ISC Accountancy syllabus, examination year 2028, Class XI unit weightage

Key concepts

Capital expenditure

Capital expenditure is spending that gives benefit for more than one accounting year, by:

• Acquiring a fixed asset (land, building, machinery, furniture, vehicles, patents, goodwill);
• Increasing the earning capacity of an existing asset (an extension to a factory, an extra floor);
• Reducing operating costs (installing solar panels that cut power bills);
• Extending the life of an asset (a new engine in an old truck);
• Bringing an asset into working condition: freight, cartage, installation, legal charges and registration on purchase of land, cost of a trial run, first major repairs to second-hand assets.

Treatment: shown as an asset in the Balance Sheet; only its depreciation is charged to the Profit and Loss Account each year.

Features: non-recurring; large amounts; benefit spread over years; improves the business's ability to earn.

Worked example

Suppose a bakery buys a second-hand oven for ₹2,40,000, pays ₹8,000 freight, ₹12,000 to repair it before first use, and ₹6,000 for installation. Find the amount capitalised. [2 marks]

Try it first, then show the solutionSolution

1. Freight, initial repairs before use and installation are all needed to bring the oven into working condition, so they are capital expenditure.
2. Cost of oven = 2,40,000 + 8,000 + 12,000 + 6,000 = ₹2,66,000.

Answer: ₹2,66,000 is capitalised (debited to Oven/Machinery A/c).

Revenue expenditure

Revenue expenditure is spending whose benefit is used up within the current accounting year, incurred to run the business or maintain assets in working order:

• Purchase of goods for resale and raw materials;
• Operating expenses: wages, salaries, rent, power, carriage, advertisement (normal), insurance, stationery;
• Maintenance and repairs that keep an asset working without adding to its capacity or life (servicing, repainting, oil change);
• Depreciation, interest on loans, discount allowed.

Treatment: charged to the Trading or Profit and Loss Account of the year.

Basis	Capital expenditure	Revenue expenditure
Benefit	More than one year	Current year only
Purpose	Acquire or improve fixed assets	Maintain assets; run business
Nature	Non-recurring	Recurring
Shown in	Balance Sheet (asset)	Trading / P&L Account
Effect on profit	Only depreciation reduces profit	Fully reduces profit of the year
Earning capacity	Increases it	Maintains it

Worked example

Classify: (i) ₹4,000 for repainting the office; (ii) ₹3,50,000 for adding a floor to the shop; (iii) ₹9,000 for the annual servicing of delivery vans; (iv) ₹45,000 for replacing a van's engine, extending its life by 4 years. [2 marks]

Try it first, then show the solutionSolution

1. (i) and (iii) maintain existing assets, with benefit within the year: revenue.
2. (ii) increases capacity; (iv) extends life: capital.

Answer: Revenue: (i), (iii). Capital: (ii), (iv).

Capital receipts and revenue receipts

Capital receipts do not arise from the normal trading of the business; they either create a liability or reduce an asset:

• Capital introduced by the owner;
• Loans raised (bank loan, debentures);
• Sale proceeds of fixed assets or long-term investments;
• Insurance claim received for a destroyed fixed asset.

They are shown in the Balance Sheet (as increases in capital or liabilities, or decreases in assets).

Revenue receipts arise from the normal course of business and are recurring:

• Sale of goods; fees for services;
• Interest, dividend, rent, commission received;
• Discount received; bad debts recovered.

They are credited to the Trading or Profit and Loss Account.

Basis	Capital receipt	Revenue receipt
Source	Owner, lenders, sale of fixed assets	Normal operations
Nature	Non-recurring	Recurring
Shown in	Balance Sheet	Trading / P&L Account
Effect on profit	None (except any capital profit)	Increases profit

Worked example

Suppose during a year a stationer receives: sales ₹9,60,000; a bank loan ₹3,00,000; ₹40,000 from selling an old car; interest on deposits ₹6,000; commission ₹12,000. Find total revenue receipts and total capital receipts. [2 marks]

Try it first, then show the solutionSolution

1. Revenue receipts = 9,60,000 + 6,000 + 12,000 = ₹9,78,000.
2. Capital receipts = 3,00,000 + 40,000 = ₹3,40,000.

Answer: Revenue receipts ₹9,78,000; capital receipts ₹3,40,000.

Capital and revenue profits

Revenue profit (income) arises from the normal operations of the business: profit on sale of goods, commission and interest earned. It is shown in the Profit and Loss Account and can be freely withdrawn or distributed.

Capital profit arises from non-trading transactions, usually from the sale of fixed assets or investments above book value, or from raising capital at a premium:

• Profit on sale of land, building, machinery or investments;
• Premium on issue of shares (for companies);
• Profit on revaluation of assets.

Capital profit = Sale price of fixed asset − Book value. In a sole trader's books, a capital profit is usually credited to the Profit and Loss Account (as a separate, non-operating item) or transferred to a Capital Reserve; it is not part of operating profit.

Worked example

Suppose a machine with a book value of ₹2,00,000 is sold for ₹2,60,000, and goods costing ₹1,50,000 are sold for ₹1,80,000. Classify the two profits. [2 marks]

Try it first, then show the solutionSolution

1. Machine: 2,60,000 − 2,00,000 = ₹60,000, from sale of a fixed asset: capital profit.
2. Goods: 1,80,000 − 1,50,000 = ₹30,000, from normal trading: revenue profit.

Answer: Capital profit ₹60,000; revenue profit ₹30,000.

Capital losses and revenue losses

Revenue losses arise in the normal course of business and are charged to the Profit and Loss Account (or Trading Account):

• Bad debts; loss on sale of goods below cost; loss of stock in transit; discount allowed.

Capital losses arise from non-trading events or the sale of fixed assets:

• Loss on sale of fixed assets or investments below book value;
• Loss of fixed assets by fire or flood (not covered by insurance);
• Discount on issue of shares or debentures; preliminary expenses (for companies).

A capital loss is usually written off against capital profits or the Profit and Loss Account over time; in sole trader problems it is shown in the Profit and Loss Account as a separate, non-operating item.

Abnormal loss of goods (stock lost by fire) is credited to the Trading Account and debited to the Profit and Loss Account, so it does not distort gross profit.

Worked example

Suppose in one year a firm (i) writes off ₹14,000 as bad debts; (ii) sells a delivery van with book value ₹1,10,000 for ₹85,000; (iii) loses an uninsured godown worth ₹3,00,000 in a flood. Classify each loss and find the capital losses. [2 marks]

Try it first, then show the solutionSolution

1. (i) Bad debts arise in normal trade: revenue loss ₹14,000.
2. (ii) 1,10,000 − 85,000 = ₹25,000 on a fixed asset: capital loss. (iii) Fixed asset destroyed: capital loss ₹3,00,000.

Answer: Revenue loss ₹14,000; capital losses 25,000 + 3,00,000 = ₹3,25,000.

Deferred revenue expenditure

Deferred revenue expenditure is revenue in nature (it creates no asset you can own or sell) but so heavy and with benefit lasting several years that charging it all to one year would distort profit. It is therefore spread (written off) over the years of benefit, and the part not yet written off is shown on the assets side of the balance sheet as a fictitious asset (e.g. 'Advertisement Suspense A/c').

Examples:

• A heavy advertisement campaign to launch a new product;
• Research and development costs of a new product;
• Major repairs that do not add to capacity but are unusually large;
• Shifting the business to a new site;
• Preliminary expenses of a company.

Annual write-off = Total expenditure ÷ Number of years of benefit.

*Note*: modern accounting standards for companies require most such costs to be expensed when incurred, but the concept and its school-level treatment are part of the ISC syllabus.

Worked example

Suppose a firm spends ₹6,00,000 on an advertising campaign for a new range, expected to benefit 4 years. How much is charged to profit in year 1, and what appears in the balance sheet at the end of year 1? [2 marks]

Try it first, then show the solutionSolution

1. Annual write-off = 6,00,000 ÷ 4 = ₹1,50,000 charged to the Profit and Loss Account.
2. Balance 6,00,000 − 1,50,000 = ₹4,50,000 shown on the assets side as Advertisement Suspense.

Answer: ₹1,50,000 charged; ₹4,50,000 shown as deferred revenue expenditure (fictitious asset).

Capital and Revenue Expenditure and Receipts in real life

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

Topics in this chapter

• Capital and Revenue Receipts, Profits and Losses
• Capital, Revenue and Deferred Revenue Expenditure

Capital and Revenue Expenditure and Receipts: key facts

Cost of a fixed asset

Cost = Purchase price + Freight + Installation + Legal/registration + Initial repairs before use

Capital profit or loss

Capital profit (loss) = Sale price of fixed asset − Book value

Deferred revenue write-off

Annual write-off = Total deferred revenue expenditure ÷ Years of benefit

Unwritten-off balance is shown on the assets side.

Correcting profit for misclassification

Correct profit = Reported profit + Capital items charged as expense − Revenue items capitalised (± depreciation effect)

Capital and Revenue Expenditure and Receipts: diagrams to practise

Practise each one on paper: draw it from the checklist, then tick off every label.

How the school exam asks Capital and Revenue Expenditure and Receipts

The question patterns to expect, and the method that works for each.

Tricks to remember Capital and Revenue Expenditure and Receipts

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

• One year rule

  Benefit ends this year → revenue. Benefit beyond this year → capital (or deferred revenue if no asset).

  Use it when: Every classification.

• Restore vs improve

  Repairs that restore are revenue; changes that improve, add or extend are capital.

  Use it when: Repairs and renewals.

• Receipts: 'Who gave it?'

  Owner, lender or buyer of a fixed asset → capital receipt. Customer or normal earnings → revenue receipt.

  Use it when: Receipts.

Capital and Revenue Expenditure and Receipts: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section A style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 6-mark question split into 2 + 2 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Capital and Revenue Expenditure and Receipts

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

• ✗Mistake: Treating freight and installation on a new asset as revenue

  They are needed to bring the asset into use, so they are part of its cost.

  ✓Do this: Everything until the asset is ready for use is capitalised.

  Usually costs: 1 mark per item.

• ✗Mistake: Treating the whole sale price of an asset as a capital profit

  The whole price is a capital receipt; only the excess over book value is a capital profit.

  Wrong working

  Sale of furniture for ₹20,000: capital profit ₹20,000.

  Right working

  Capital receipt ₹20,000; capital profit = 20,000 − 12,000 = ₹8,000.

  ✓Do this: Write 'receipt' and 'profit' as two separate lines.

  Usually costs: 1 mark.

• ✗Mistake: Calling every big repair capital

  Size alone does not decide. A big repair that only restores is revenue (or deferred revenue if unusually heavy with multi-year benefit).

  ✓Do this: Ask: restore, or improve/extend?

  Usually costs: 1 mark.

• ✗Mistake: Writing off all deferred revenue expenditure in year 1

  The point of the concept is to spread the cost over the years of benefit.

  ✓Do this: Annual write-off = total ÷ years; carry the balance forward on the assets side.

  Usually costs: 1-2 marks.

• ✗Mistake: Classifying a loan as income

  A loan must be repaid; it is a liability and a capital receipt, not revenue.

  ✓Do this: Receipts from owners and lenders are always capital receipts.

  Usually costs: 1 mark.

Practice questions on Capital and 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.

1. Q1 · 1 mark · MCQExam level

   Which of these is a revenue receipt?
   (a) Capital introduced
   (b) Sale of old machinery
   (c) Commission received
   (d) Bank loan

   Hint

   Normal earnings.

   Answer

   (c) Commission received.

2. Q2 · 2 marks · Short answerExam level

   Give two examples each of capital expenditure and revenue expenditure for a hospital.

   Hint

   Assets vs running costs.

   Answer

   Capital: purchase of an MRI machine; construction of a new ward. Revenue: salaries of nurses; medicines and consumables (also electricity, repairs).

3. Q3 · 3 marks · Short answerExam level

   Distinguish between capital receipts and revenue receipts on three bases.

   Hint

   Source, recurrence, treatment.

   Answer

   Source: owners, lenders, sale of fixed assets vs normal operations. Nature: non-recurring vs recurring. Treatment: Balance Sheet vs Trading/P&L (revenue receipts increase profit; capital receipts do not, except any capital profit).

4. Q4 · 2 marks · Short answerHarder exam level

   Suppose a firm buys a building for ₹40,00,000, pays stamp duty and registration ₹2,80,000, brokerage ₹40,000, and spends ₹1,50,000 on renovation before occupation and ₹25,000 on annual maintenance after it moves in. Find the cost of the building.

   Hint

   Maintenance after use is revenue.

   Answer

   40,00,000 + 2,80,000 + 40,000 + 1,50,000 = ₹44,70,000; the ₹25,000 maintenance is revenue expenditure.

5. Q5 · 2 marks · Short answerHarder exam level

   Suppose a firm's profit is ₹2,60,000 after charging ₹50,000 spent on a new computer system to the Office Expenses A/c. Depreciation on computers is 20% p.a. for a full year. Find the correct profit.

   Hint

   Add back the cost; charge depreciation.

   Answer

   2,60,000 + 50,000 − 10,000 (depreciation) = ₹3,00,000.

6. Q6 · 2 marks · Short answerHarder exam level

   Is the following capital or revenue? (a) ₹15,000 spent on a feasibility study for a new branch that was never opened; (b) ₹2,00,000 compensation paid to workers retrenched to modernise a factory.

   Hint

   Is an asset created?

   Answer

   (a) Revenue: no asset results (an abandoned study is written off). (b) Treated as deferred revenue expenditure: heavy, no asset, but the benefit (lower costs) lasts several years; it may be spread over those years.

7. Q7 · 2 marks · Short answerHarder exam level

   Suppose ₹2,40,000 was spent on overhauling a machine bought second-hand a week earlier, before it was first used, and ₹30,000 on its repairs after a year of use. Classify each and explain the difference.

   Hint

   Before or after first use.

   Answer

   ₹2,40,000 is capital: initial repairs to put a second-hand asset into working condition are part of cost. ₹30,000 is revenue: it maintains an asset already in use.

8. Q8 · 3 marks · Short answerHOTS / competency

   Suppose a firm wrongly capitalised ₹60,000 of repairs and also charged ₹60,000 spent on a new van to Repairs A/c. A partner says, 'The two errors cancel, so profit is correct.' Is he right? What else is wrong?

   Hint

   Profit and balance sheet separately.

   Answer

   Profit is correct in total (−60,000 + 60,000), but the van's depreciation is missed (profit slightly overstated), and the balance sheet is wrong: the van (an asset) is missing while a fictitious ₹60,000 'repairs' asset is shown. Classification affects both statements, not only profit.

9. Q9 · 3 marks · Short answerHOTS / competency

   Suppose ₹7,50,000 was spent on a campaign with benefit for 5 years, starting 1st January 2026, and books close on 31st March. Find the write-off for 2025-26 and 2026-27 and the balance on 31st March 2027.

   Hint

   ₹1,50,000 a year, by months.

   Answer

   2025-26 (3 months): 1,50,000 × 3/12 = ₹37,500. 2026-27: ₹1,50,000. Balance on 31.3.2027 = 7,50,000 − 1,87,500 = ₹5,62,500.

10. Q10 · 3 marks · Short answerHOTS / competency

    Suppose a firm received ₹3,50,000 as an insurance claim for a factory shed (book value ₹4,10,000) destroyed by fire, and ₹40,000 as a claim for stock destroyed. Classify the receipts and losses.

    Hint

    Fixed asset vs stock.

    Answer

    Shed claim: capital receipt ₹3,50,000; capital loss = 4,10,000 − 3,50,000 = ₹60,000. Stock claim: a revenue item: ₹40,000 reduces the abnormal (revenue) loss of stock charged to the Profit and Loss Account.

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. 1.Benefit beyond one year: capital or revenue?Show answer

   Capital.

2. 2.Installation charges of a new machine?Show answer

   Capital expenditure.

3. 3.Sale proceeds of a fixed asset?Show answer

   Capital receipt.

4. 4.Profit on sale of land?Show answer

   Capital profit.

5. 5.Heavy advertisement with benefit for 3 years?Show answer

   Deferred revenue expenditure.

6. 6.Bad debts: capital or revenue loss?Show answer

   Revenue loss.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Capital expenditure: acquire, improve, extend life, reduce costs, bring into use → Balance Sheet.
• ☐Revenue expenditure: maintain and run → Trading / P&L.
• ☐Capital receipts: owner, lenders, sale of fixed assets → Balance Sheet.
• ☐Revenue receipts: sales and normal income → P&L.
• ☐Capital profit = sale price − book value of a fixed asset.
• ☐Capital losses: sale of fixed assets below book value; uninsured fixed assets destroyed.
• ☐Deferred revenue: heavy, multi-year benefit, no asset; spread; balance shown as an asset.

Capital and Revenue Expenditure and Receipts: frequently asked questions