AccountsISC Class 11 · Capital and Revenue Expenditure and Receipts

Capital, Revenue and Deferred Revenue Expenditure: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

Capital expenditure gives benefit for more than one year, creates or improves an asset or earning capacity, and is shown in the balance sheet. Revenue expenditure maintains the business and earns income of the current year and is charged to the Profit and Loss Account. Deferred revenue expenditure is revenue in nature but its benefit spreads over several years, so it is written off over those years.

Compare the year blocks: capital lasts many years, revenue one year, and deferred revenue is written off a little each year.

Illustration drawn for QuestionBuddy.

Understand Capital, Revenue and Deferred Revenue Expenditure

Capital expenditure. Spent to buy a fixed asset, to add to its value or earning capacity, or to bring it to working condition. Examples: purchase of machinery, cost of installation, legal charges to buy land, wages for building one's own machine, brokerage on buying property. Shown as an asset; depreciation is charged.

Revenue expenditure. Spent to run the business and maintain assets, benefiting the current year: wages, rent, salaries, ordinary repairs, depreciation, interest on loan, cost of goods purchased for resale, carriage inwards, insurance premium.

Deferred revenue expenditure. Expenditure of a revenue nature whose benefit extends over more than one year, such as heavy advertisement for launching a product or the cost of a major overhaul. A part is written off each year; the unwritten part is shown as an asset (a fictitious one).

Tests. (1) *Does it create or improve an asset or increase earning capacity?* then capital. (2) *Is it incurred to maintain the asset or the business?* then revenue. (3) *Is the benefit used up in the year?* then revenue; *more than a year?* then capital (or deferred). (4) *Is the item bought for resale?* then revenue (purchases).

Special cases.

*Repairs:* ordinary repairs: revenue; repairs at purchase of a second-hand machine to put it into use: capital.
*Replacement of a part:* revenue if it only maintains efficiency; capital if it increases capacity.
*Legal fees:* to buy property: capital; to recover debts: revenue.
*Interest during construction* of an asset: capital.
*Heavy advertisement:* deferred revenue.
*Trial run expenses:* capital.

Effect of wrong treatment. Treating revenue as capital overstates profit and assets; treating capital as revenue understates profit and assets.

Capital, Revenue and Deferred Revenue Expenditure: key facts

Cost of asset: Capital cost = Purchase price + Freight + Installation + Legal fees + Trial run costs | All costs to get it ready; Excludes ordinary repairs.
Deferred expenditure: Annual write-off = Total expenditure / Years of benefit | Balance carried as an asset; Equal instalments assumed.
Error effect: Revenue treated as capital: profit overstated | Capital treated as revenue: profit understated; By the same amount.

How to answer Capital, Revenue and Deferred Revenue Expenditure questions

Classify each item with a reason, then compute its effect.

1Ask whether the item creates or improves an asset.
2Ask how long the benefit lasts.
3Assign capital, revenue or deferred revenue with one-line reason.
4For corrections, adjust profit by the amount treated wrongly (and by depreciation if any).

Capital, Revenue 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.

Repairs vs installation

Suppose a tailor buys a second-hand stitching machine for Rs 18,000, pays Rs 2,000 for repairs to make it work, and later pays Rs 600 to oil and service it.

Which amounts are capital and which revenue?

Try it first, then show the solutionSolution

The Rs 2,000 repairs were needed to bring the machine into use: capital, so the machine costs Rs 20,000.
Routine servicing of Rs 600 maintains it: revenue.

Answer: Capital: Rs 18,000 + Rs 2,000 = Rs 20,000; revenue: Rs 600.

Memory hook: To get ready: capital. To keep running: revenue.

Tricks to remember Capital, Revenue and Deferred Revenue Expenditure

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

Get it / keep it
Cost to get an asset ready is capital; cost to keep it going is revenue.
Use it when: Test.
Deferred = spread
Revenue in nature, capital in benefit; spread over years.
Use it when: Deferred revenue.
Profit effect
Capital wrongly expensed lowers profit; revenue wrongly capitalised raises it.
Use it when: Error effect.

Capital, Revenue and Deferred Revenue Expenditure: solved examples

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

Example 1: Classify · 1 mark · MCQBoard level

Carriage paid on the purchase of machinery is:
(a) revenue expenditure (b) capital expenditure (c) deferred revenue (d) a loss

Try it first, then show the solutionSolution

It is part of the cost of getting the asset to the business: capital.

Answer: (b) capital expenditure

Example 2: Classification with reasons · 5 marks · Short answerBoard level

Classify with reasons: (i) wages paid to build a shed Rs 40,000 (ii) repair of furniture Rs 3,000 (iii) legal fees on purchase of land Rs 8,000 (iv) cost of a major advertising campaign for a product launch Rs 90,000 benefiting 3 years (v) purchase of stock for resale. (5 marks)

Try it first, then show the solutionSolution

(i) Capital: it creates an asset.
(ii) Revenue: maintenance.
(iii) Capital: cost of acquiring land.
(iv) Deferred revenue: revenue nature, 3 years' benefit.
(v) Revenue: purchases.

Answer: (i) capital; (ii) revenue; (iii) capital; (iv) deferred revenue; (v) revenue.

Example 3: Cost of an asset · 5 marks · Long answerHarder board level

A firm buys a printing machine: invoice price Rs 4,80,000; trade discount 5%; freight Rs 8,000; installation Rs 12,000; repairs during the first year Rs 15,000; training of staff Rs 6,000 (regular). Find the capital cost of the machine and the revenue items. (5 marks)

Try it first, then show the solutionSolution

Net price = 4,80,000 - 24,000 = Rs 4,56,000.
Capital cost = 4,56,000 + 8,000 + 12,000 = Rs 4,76,000.
Repairs Rs 15,000 and training Rs 6,000 are revenue: Rs 21,000.

Answer: Capital cost Rs 4,76,000; revenue items Rs 21,000.

Example 4: Deferred revenue expenditure · 4 marks · Short answerHarder board level

A company spends Rs 1,50,000 on a launch advertising campaign expected to help for 5 years. Show the amount charged to profit each year and the amount in the balance sheet at the end of year 2. (4 marks)

Try it first, then show the solutionSolution

Annual charge = 1,50,000 / 5 = Rs 30,000.
After 2 years written off 60,000; balance = Rs 90,000.

Answer: Rs 30,000 a year; Rs 90,000 shown as an asset after 2 years.

Example 5: Error and profit · 6 marks · Long answerHOTS / competency

Profit before adjustment is Rs 2,00,000. The books show: purchase of a machine for Rs 50,000 debited to Repairs; wages Rs 12,000 paid for erecting that machine debited to Wages; and a painting of the building Rs 9,000 capitalised. Correct the profit, ignoring depreciation, and state the effect on assets. (6 marks)

Try it first, then show the solutionSolution

Machine and erection wages are capital: add back 50,000 + 12,000 = 62,000 to profit.
Painting is revenue: reduce profit by 9,000.
Corrected profit = 2,00,000 + 62,000 - 9,000 = Rs 2,53,000.
Assets increase by 62,000 - 9,000 = Rs 53,000.

Answer: Profit Rs 2,53,000; assets increase by Rs 53,000.

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

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

Mistake: Writing off installation as revenue
Looks like a service cost.
Wrong working
Installation to Profit and Loss
Right working
Installation added to the machine
Do this: Cost to put in working condition is capital.
Usually costs: 1-2 marks.
Mistake: Calling ordinary repairs capital
Mixed with purchase repairs.
Wrong working
Repairs to machine in use debited to Machinery
Right working
Repairs to Profit and Loss
Do this: Maintenance is revenue.
Usually costs: 1 mark.
Mistake: Writing off all of a deferred expense in year 1
Not spreading.
Wrong working
Charge 1,50,000
Right working
Charge 30,000 a year
Do this: Spread over the benefit period.
Usually costs: 2 marks.

Exam tips

Give a one-line reason for each classification.
Compute net cost after trade discount.
State the effect on profit and assets when asked for corrections.

Practice questions on Capital, Revenue 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 · 1 mark · MCQBoard level
Expenditure on the replacement of a worn-out part to maintain efficiency is:
(a) capital (b) revenue (c) deferred revenue (d) a capital receipt
Hint
Maintains, does not add capacity.
Answer
(b) revenue
Q2 · 3 marks · Short answerBoard level
Distinguish between capital expenditure and revenue expenditure on any three points. (3 marks)
Hint
Benefit, treatment, effect.
Answer
Capital: benefit beyond a year, shown as an asset and depreciated, creates or improves an asset. Revenue: benefit within the year, charged to Profit and Loss, maintains the business.
Q3 · 5 marks · Long answerHarder board level
A firm purchases a second-hand lorry for Rs 3,20,000, pays Rs 15,000 for repairs before use, Rs 6,000 for registration, Rs 4,000 for insurance for the first year and Rs 2,500 for painting its name. Find the capital cost and the revenue items. (5 marks)
Hint
Which are needed to put it in use?
Answer
Capital cost = 3,20,000 + 15,000 + 6,000 = Rs 3,41,000. Revenue: insurance Rs 4,000 and painting Rs 2,500 (advertising) = Rs 6,500.
Q4 · 4 marks · Short answerHarder board level
A shop spends Rs 90,000 on an advertising campaign, of which it treats Rs 60,000 as benefiting 4 years. Show the treatment in year 1 and the year-1 balance in the balance sheet. (4 marks)
Hint
Part is revenue, part deferred.
Answer
Rs 30,000 revenue in year 1. Rs 60,000 is deferred: charge 15,000, balance 45,000. Year-1 charge total Rs 45,000; balance sheet Rs 45,000.
Q5 · 4 marks · Short answerHOTS / competency
A newly formed company debited the Rs 70,000 cost of installing a boiler to Repairs, while Rs 25,000 of routine repairs was debited to Boiler account. Find the net effect on profit and on the asset value before depreciation. (4 marks)
Hint
Net effect of two errors.
Answer
Profit is understated by 70,000 (installation) and overstated by 25,000 (repairs): net understated by Rs 45,000. The boiler account is understated by 45,000 (70,000 should be added and 25,000 removed).

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 for?Show answer
More than one year.
2.Deferred revenue example?Show answer
Heavy launch advertising.
3.Installation of machinery is?Show answer
Capital.
4.Wages are?Show answer
Revenue.
5.Capital treated as revenue does what to profit?Show answer
Understates it.

Capital, Revenue and Deferred Revenue Expenditure: frequently asked questions

Is depreciation capital or revenue?

Revenue.

Is purchase of goods capital?

No, revenue.

Where is deferred expenditure shown?

As an asset till written off.

Do small repairs get capitalised?

No.