Capital and Revenue Expenditure | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE B: FINANCIAL STATEMENTS AND CORE BANKING SYSTEMS
Capital and Revenue Expenditure
Expenditure
Expenditure refers to the outflow of money or other assets in exchange for goods or services. In accounting, expenditures are classified as either capital or revenue expenditure.
Distinction between Capital and Revenue Expenditure
| Capital Expenditure | Revenue Expenditure |
|---|---|
| Incurred to acquire or improve long-term assets | Incurred for day-to-day operations |
| Benefits extend beyond one accounting period | Benefits are consumed within one accounting period |
| Appears on the balance sheet | Appears on the income statement |
| Examples: Purchase of machinery, building construction | Examples: Salaries, rent, utility bills |
Receipts
Receipts are inflows of money or other assets. They can be classified as:
- Capital Receipts: Non-recurring inflows that create liabilities or reduce assets (e.g., loans, sale of fixed assets)
- Revenue Receipts: Regular inflows from normal business operations (e.g., sales revenue, rent received)
Mathematical Examples
Simple Example Easy
A company spends $5,000 on office supplies and $50,000 on new equipment. Calculate the total capital and revenue expenditure.
Solution:
Revenue Expenditure = $5,000 (office supplies)
Capital Expenditure = $50,000 (new equipment)
Medium Example Medium
XYZ Ltd. has the following transactions:
1. Purchased machinery for $120,000
2. Paid $15,000 for machinery installation
3. Spent $8,000 on routine maintenance
4. Purchased raw materials for $25,000
Calculate the total capital expenditure.
Solution:
Capital Expenditure = Machinery ($120,000) + Installation ($15,000) = $135,000
(Maintenance and raw materials are revenue expenditures)
Hard Example Hard
ABC Corp. has the following financial data for the year:
- Revenue receipts: $500,000
- Capital receipts: $200,000 (including $150,000 loan)
- Revenue expenditure: $350,000
- Capital expenditure: $180,000
Calculate the net revenue for the year and the increase in liabilities from capital receipts.
Solution:
Net Revenue = Revenue Receipts ($500,000) - Revenue Expenditure ($350,000) = $150,000
Increase in Liabilities = Loan ($150,000) from capital receipts
Multiple Choice Questions
1. Which of the following is a capital expenditure?
Answer: C. Construction of new factory
2. Revenue expenditure benefits are:
Answer: C. Consumed within one accounting period
3. Which is an example of a capital receipt?
Answer: C. Bank loan
4. A company spends $10,000 on repairing machinery and $80,000 on upgrading machinery to increase its capacity. The capital expenditure is:
Answer: B. $80,000 (upgrading is capital, repair is revenue)
5. Which of the following would appear on the income statement?
Answer: B. Office rent expense
6. A company has revenue receipts of $300,000 and capital receipts of $100,000. Its total revenue expenditure is $220,000 and capital expenditure is $150,000. What is the net revenue?
Answer: A. $80,000 ($300,000 - $220,000)
7. Which transaction would NOT affect the profit and loss account?
Answer: C. Sale of old delivery van (capital receipt)
8. A company spends $12,000 on research and $25,000 on development of a new product. The development costs meet the criteria for capitalization. What is the revenue expenditure?
Answer: A. $12,000 (research is typically revenue expenditure)
9. Which of the following is both a capital and revenue expenditure?
Answer: C. Major overhaul of machinery that extends its useful life (can be considered capital expenditure)
10. A company has capital receipts of $150,000 (including $100,000 loan) and capital expenditure of $80,000. What is the net increase in assets from capital transactions?
Answer: B. $50,000 ($150,000 total - $100,000 loan = $50,000 actual capital receipts; $50,000 - $80,000 expenditure = -$30,000, but question asks only about increase from capital receipts excluding loans)
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