IGCSE Accounting — Capital and Revenue Expenditure: Notes, Practice Questions & Worked Solutions

IGCSE Accounting 0452 · Section 4: Accounting Procedures

Capital and Revenue Expenditure

Getting this classification wrong distorts both the statement of profit or loss and the statement of financial position — so it’s worth knowing the distinction cold.

1. The Key Distinction

	Capital	Revenue
Expenditure	Buying or improving a non-current asset (adds long-term value)	Day-to-day running costs (maintains the business’s current earning capacity)
Receipts	From selling a non-current asset, or capital introduced/loans	From normal trading activities (e.g. sales revenue, rent received)

Worked example — classifying expenditure Classify each as capital or revenue expenditure: (a) purchase of a delivery van $15,000, (b) cost of vehicle repairs $200, (c) cost of an extension to a building $5,000, (d) cost of painting the building $300.
(a) Capital — buying a non-current asset. (b) Revenue — routine running cost. (c) Capital — improves/extends the asset. (d) Revenue — routine maintenance, doesn’t add new value.

2. Effect of Misclassification

If capital expenditure is wrongly treated as revenue expenditure: expenses in the statement of profit or loss are overstated, so profit is understated, and the asset is missing from the statement of financial position, so assets are understated.

If revenue expenditure is wrongly treated as capital expenditure, the opposite happens: expenses are understated, so profit is overstated, and a non-existent or overvalued asset appears, so assets are overstated.

Common mistakes to watch for

Assuming a large amount automatically means capital expenditure — the test is whether it creates/improves a non-current asset, not the size of the amount.
Forgetting that costs directly needed to get an asset ready for use (e.g. delivery and installation costs) count as capital expenditure too, added to the asset’s cost.
Mixing up which direction profit moves when expenditure is misclassified — always work through it logically rather than memorising a rule blindly.

Key Vocabulary Recap

Capital expenditure — spending that buys or improves a non-current asset

Revenue expenditure — spending on the routine running of the business

Syllabus Reference

This note covers IGCSE Accounting 0452 Section 4, Capital and Revenue Expenditure: capital vs revenue expenditure, capital vs revenue receipts, correct accounting treatment, and the effects of incorrect treatment on profit and asset values.

Practice questions

IGCSE Accounting 0452 · Section 4: Capital and Revenue Expenditure — Practice Question Bank (no answers)

Capital and Revenue Expenditure — Practice

Covers: classifying expenditure/receipts, and the effect of misclassification. 10 questions.

Define capital expenditure.

Define revenue expenditure.

Classify each as capital or revenue expenditure: (a) purchase of new machinery, (b) cost of fuel for delivery vehicles.

Classify each as capital or revenue expenditure: (a) installation costs of new machinery, (b) annual insurance on the machinery.

Classify each as a capital or revenue receipt: (a) proceeds from selling an old delivery van, (b) cash received from a credit customer.

Explain the effect on profit if capital expenditure is wrongly recorded as revenue expenditure.

Explain the effect on the statement of financial position if capital expenditure is wrongly recorded as revenue expenditure.

Explain the effect on profit if revenue expenditure is wrongly recorded as capital expenditure.

A business repaints its shop front. Explain whether this should be treated as capital or revenue expenditure.

Q10

A business pays delivery costs to bring new machinery to its factory. Explain whether this should be treated as capital or revenue expenditure.

Worked solutions

Show worked solutions

IGCSE Accounting 0452 · Section 4: Capital and Revenue Expenditure — Solutions

Capital and Revenue Expenditure — Practice: Solutions

Define capital expenditure.

✓Capital expenditure is spending on buying, improving, or extending a non-current asset — adding long-term value to the business.

Define revenue expenditure.

✓Revenue expenditure is spending on the day-to-day running costs of the business, which maintains (rather than adds to) its current earning capacity.

Classify: machinery, fuel.

✓(a) Machinery — capital expenditure (b) Fuel — revenue expenditure

Classify: installation costs, insurance.

✓(a) Installation costs — capital expenditure (needed to get the asset ready for use, added to its cost) (b) Annual insurance — revenue expenditure (a recurring running cost)

Classify: proceeds from van sale, cash from customer.

✓(a) Proceeds from selling a van — capital receipt (b) Cash from a credit customer — revenue receipt

Effect on profit if capital treated as revenue.

✓Expenses in the statement of profit or loss are overstated (the capital item is wrongly included as an expense), so profit for the year is understated.

Effect on SOFP if capital treated as revenue.

✓The non-current asset is missing from the statement of financial position (since it was expensed instead of capitalised), so non-current assets — and therefore total assets — are understated.

Effect on profit if revenue treated as capital.

✓Expenses are understated (the revenue item is wrongly excluded from expenses and added to an asset instead), so profit for the year is overstated.

Repainting shop front — capital or revenue?

✓Revenue expenditure — repainting is routine maintenance that restores the asset’s condition, rather than improving or extending it.

Q10

Delivery cost of new machinery — capital or revenue?

✓Capital expenditure — delivery costs necessary to get a newly purchased asset ready for use are included as part of the asset’s cost, not treated as a separate running expense.

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