How to Use This Page
Solve each Samacheer Kalvi exercise question on your own first, then compare your classification and answer. The key skill in this chapter is correctly classifying transactions as capital or revenue — examiners love to test borderline cases.
Key Concepts (Quick Recap)
Capital Expenditure
Expenditure that:
- Gives benefit for more than one accounting year
- Creates or acquires a fixed asset
- Increases the earning capacity of the business
- Appears on the assets side of the balance sheet
Examples: Purchase of machinery, building, furniture; installation cost of machinery; registration fees for new factory
Revenue Expenditure
Expenditure that:
- Gives benefit only in the current accounting year
- Maintains (not increases) the earning capacity
- Is recurring in nature
- Is charged to the Profit & Loss Account
Examples: Salaries, rent, repairs, fuel, advertising, insurance premium
Deferred Revenue Expenditure
Expenditure that:
- Is revenue in nature but the benefit extends beyond the current year
- Is heavy/non-recurring — too large to charge to one year
- A portion is charged to P&L each year; the remainder is shown as an asset (fictional asset)
- Example: Huge advertising expenditure for a new product, research and development costs
Capital Receipts vs Revenue Receipts
| Feature | Capital Receipt | Revenue Receipt |
|---|---|---|
| Source | Non-operating activities | Operating activities |
| Nature | One-time, non-recurring | Regular, recurring |
| Effect | Increases liability or reduces asset | Increases profit |
| Examples | Sale of fixed asset, loan received, capital contributed | Sale of goods, interest received, commission received |
| Shown in | Balance Sheet (liability or deducted from asset) | Profit & Loss Account (credit side) |
Capital Profit vs Revenue Profit
| Feature | Capital Profit | Revenue Profit |
|---|---|---|
| Source | Sale of fixed asset above book value | Sale of goods above cost |
| Nature | Non-recurring | Recurring |
| Shown in | P&L (credit) but not from operations | P&L (credit) from operations |
Capital Loss vs Revenue Loss
| Feature | Capital Loss | Revenue Loss |
|---|---|---|
| Source | Sale of fixed asset below book value | Sale of goods below cost, expenses exceeding income |
| Nature | Non-recurring | Recurring |
| Shown in | Balance Sheet (debited as fictitious asset) | P&L (debit side) |
I. Choose the Best Answer (MCQs)
Q1. Purchase of machinery is a (a) Revenue expenditure (b) Capital expenditure (c) Deferred revenue expenditure (d) Revenue receipt
Q2. Salaries paid to employees is a (a) Capital expenditure (b) Revenue expenditure (c) Capital receipt (d) Deferred revenue expenditure
Q3. Heavy advertising expenditure for launching a new product is classified as (a) Capital expenditure (b) Revenue expenditure (c) Deferred revenue expenditure (d) Capital receipt
Q4. Sale of old machinery results in (a) Revenue receipt (b) Capital receipt (c) Revenue expenditure (d) Deferred revenue expenditure
Q5. Treating purchase of machinery as purchase of goods is (a) Error of omission (b) Error of commission (c) Error of principle (d) Compensating error
II. Fill in the Blanks
1. Expenditure that gives benefit for more than one year is called capital expenditure. 2. Expenditure that maintains the existing earning capacity is called revenue expenditure. 3. Heavy advertising expenditure whose benefit extends beyond the current year is called deferred revenue expenditure. 4. Sale of fixed assets is a capital receipt. 5. Interest received on investment is a revenue receipt. 6. Treating a capital expenditure as a revenue expenditure is an error of principle. 7. Revenue expenditure whose benefit extends over several years is called deferred revenue expenditure. 8. Capital profit arises from the sale of a fixed asset above its book value. 9. Capital loss is shown on the assets side of the balance sheet as a fictitious asset. 10. Installment paid for purchasing a machine includes both capital and revenue elements (the interest portion is revenue).
III. True or False (with corrections for false statements)
IV. Match the Following
| Column A | Column B | Answer |
|---|---|---|
| 1. Purchase of building | (a) Revenue expenditure | (b) Capital expenditure |
| 2. Rent paid | (b) Capital expenditure | (a) Revenue expenditure |
| 3. Heavy advertising | (c) Deferred revenue expenditure | (c) Deferred revenue expenditure |
| 4. Sale of old furniture | (d) Capital receipt | (d) Capital receipt |
| 5. Commission received | (e) Revenue receipt | (e) Revenue receipt |
V. Answer Briefly (2-mark questions)
VI. Answer in Detail (5-mark questions)
Q1. Classify the following into capital and revenue expenditure: 1. Purchase of machinery ₹50,000 2. Repairs to machinery ₹5,000 3. Installation of machinery ₹10,000 4. Annual insurance premium ₹3,000 5. Carriage on purchase of machinery ₹2,000 6. Wages paid to workers ₹15,000 7. Registration fees for new factory ₹20,000 8. White-washing of factory building ₹4,000 9. Interest on loan ₹8,000 10. Replacement of a worn-out part of machine ₹1,500
| No. | Transaction | Classification | Reason |
|---|---|---|---|
| 1 | Purchase of machinery ₹50,000 | Capital | Creates a fixed asset, benefit > 1 year |
| 2 | Repairs to machinery ₹5,000 | Revenue | Maintains existing asset, recurring |
| 3 | Installation of machinery ₹10,000 | Capital | Part of cost of bringing asset to working condition |
| 4 | Annual insurance premium ₹3,000 | Revenue | Benefit for current year only, recurring |
| 5 | Carriage on purchase of machinery ₹2,000 | Capital | Part of cost of acquiring the asset |
| 6 | Wages paid to workers ₹15,000 | Revenue | Day-to-day expense, recurring |
| 7 | Registration fees for new factory ₹20,000 | Capital | One-time cost to acquire/setup asset |
| 8 | White-washing of factory building ₹4,000 | Revenue | Maintenance, recurring |
| 9 | Interest on loan ₹8,000 | Revenue | Finance cost for the current year |
| 10 | Replacement of worn-out part ₹1,500 | Revenue | Repairs/maintenance, recurring |
Common Mistakes to Avoid
- Confusing capital and revenue expenditure: Ask yourself — "Does this create/acquire a fixed asset?" If yes → capital. "Is this a recurring day-to-day expense?" If yes → revenue.
- Treating all one-time payments as capital: A one-time repair bill is still revenue expenditure. It's the NATURE (creating asset vs maintaining), not the frequency, that matters.
- Forgetting installation and carriage as part of asset cost: Installation, carriage, and registration costs are PART of the asset's cost — they are capital expenditure, not revenue.
- Classifying deferred revenue expenditure as capital expenditure: Deferred revenue expenditure does NOT create an asset. It is revenue in nature but written off over multiple years due to its heavy amount.
- Confusing capital receipt and capital profit: Capital receipt = money received from non-operating activities (loan, sale of asset). Capital profit = excess of sale price over book value of a fixed asset.
- Error of principle: Recording a capital item in a revenue account (or vice versa) is an error of principle. This is a serious error that affects both the P&L and the Balance Sheet.
Exam Checklist
- [ ] Can you define and distinguish capital expenditure and revenue expenditure?
- [ ] Can you classify any given transaction as capital or revenue expenditure?
- [ ] Can you explain deferred revenue expenditure with a worked example?
- [ ] Can you distinguish between capital receipts and revenue receipts?
- [ ] Can you distinguish between capital profit and revenue profit?
- [ ] Can you distinguish between capital loss and revenue loss?
- [ ] Can you identify errors of principle in given transactions?
- [ ] Can you handle borderline cases: repairs vs improvements, replacement vs addition?
- [ ] Can you explain how capital loss is treated in the balance sheet?
- [ ] Can you explain the accounting treatment of deferred revenue expenditure?