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Capital and revenue expenditure
Edexcel IAL Accounting · WAC11 The Accounting System and Costing
Spending is either capital expenditure, which buys or improves non-current assets, or revenue expenditure, which runs the business day to day. Getting this right affects both profit and assets (spec 1.1.11 and 1.1.12).
The distinction
- Capital expenditure: buying non-current assets or improving them (adding capacity or extending life), including all costs to get the asset ready for use: delivery, installation, legal fees on property, architect's fees, initial testing. Recorded in the statement of financial position and depreciated.
- Revenue expenditure: the costs of running the business and maintaining assets: repairs, servicing, fuel, insurance, wages, staff training. Charged in full to the statement of profit or loss.
Similarly, capital receipts (sale of a non-current asset, capital introduced, loans) are not revenue.
Effects of a misclassification
| Error | Profit | Non-current assets |
|---|---|---|
| Capital expenditure treated as revenue (e.g. new machine charged to expenses) | Understated | Understated |
| Revenue expenditure treated as capital (e.g. repairs added to the asset) | Overstated | Overstated |
Concepts involved
- Accruals (matching): a non-current asset benefits several years, so its cost is spread over those years by depreciation rather than charged in one year.
- Materiality: low-cost items (a waste bin) are treated as revenue expenditure even though they last years.
- Prudence: when unsure, do not overstate assets.
Worked example
A machine costs £40,000. Delivery is £800, installation £1,200, the first year's service contract £500 and staff training £600. Find the amount capitalised.
- Capitalise the price and the costs of getting the machine ready: delivery and installation.
- The service contract and training are running costs, so they are revenue expenditure.
- 40,000 + 800 + 1,200 = 42,000.
Answer: Capital expenditure £42,000; revenue expenditure £1,100.
Check yourself
- A business buys a building for £250,000 and pays legal fees of £4,500, an architect £6,000 to design an extension that is then built for £38,000, and redecoration of existing offices £3,200. Find the total capital expenditure.
Show answer
£298500. 250,000 + 4,500 + 6,000 + 38,000 = 298,500. Redecoration is maintenance, so revenue expenditure.
- Repairs of £3,000 to a delivery van were added to the Vehicles account. Ignoring depreciation, by how much is profit overstated?
Show answer
£3000. Revenue expenditure treated as capital: expenses too low by £3,000, so profit too high by £3,000.
- Which is capital expenditure?
- Replacing a lorry's worn tyres
- Annual road tax on a lorry
- Fitting a larger engine to increase a lorry's load capacity
- Diesel fuel for a lorry
Show answer
Fitting a larger engine to increase a lorry's load capacity. Increasing capacity is an improvement, so capital.
- A machine's delivery charge is debited to the Carriage inwards account. What is the effect?
- Profit and non-current assets are overstated
- Profit and non-current assets are understated
- Profit is overstated and non-current assets understated
- There is no effect on profit
Show answer
Profit and non-current assets are understated. Capital expenditure has been treated as revenue expenditure.
- Which concept explains why the cost of a machine is spread over its useful life instead of being charged in the year of purchase?
- Realisation
- Business entity
- Money measurement
- Accruals (matching)
Show answer
Accruals (matching). Cost is matched with the periods that benefit from the asset.
- Which is a capital receipt?
- Cash from sales of goods
- Proceeds from selling an old delivery van
- Rent received from a tenant
- Commission received
Show answer
Proceeds from selling an old delivery van. Selling a non-current asset is not part of normal trading income.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.