Questions: Capital Expenditure vs Revenue in Nature

by Muhammad Sajjad
(Pakistan)

purchase of factory plantQ: State with reasons whether the following expenditure items are capital or revenue in nature:

  1. Purchase of Land.


  2. Installation of Plant and Machinery

  3. Expenditure incurred during the erection of Machinery.

  4. wages commissions factory workers
  5. Commission paid to a worker.

  6. Repair of truck met with an accident.

  7. Repair charges of furniture.

  8. Paid wages to factory workers.

  9. Paid advertisement expense.

A: Let's first make sure we understand what we mean by capital versus revenue in nature for expenditure.

In a nutshell, a transaction that is
capital in nature deals with long-term items, i.e. assets, liabilities or owner's equity .

In contrast, a transaction that is
revenue in nature deals with short-term items - i.e income and expenses .

Capital expenditure is spending on things that provide long-term benefits. In other words, non-current assets (meaning long-term assets).

Revenue-in-nature expenditure is spending on things that provide immediate or short-term benefits. In other words, expenses and current assets .

Here are the answers:
  1. Capital. Land is a non-current (long-term) asset.

  2. Capital. installation costs form part of an asset's cost. Since assets are long-term, so are installation costs.

  3. Same as b). Erection costs form part of the cost of the machinery (or other asset).

  4. Revenue nature. Commission and other employee costs (salaries and wages) are expenses.

  5. Revenue. Repairs and maintenance are expenses. (In contrast, improvements are capital as they result in an asset with higher value. Repairs and maintenance maintain an asset's value - they do not improve it - so these are counted as expenses.)

  6. Same as e)

  7. Same as d) - just like commissions and salaries paid.

  8. Revenue. Advertising is an expense.


Hope you enjoyed this exercise about capital vs revenue expenditure!

- Michael Celender
Accounting Basics for Students


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Comments for Questions: Capital Expenditure vs Revenue in Nature

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Is capital in nature expenditure able to be deducted?
by: Anonymous

Is capital in nature expenditure able to be deducted?

Yes, generally you can deduct expenditure which is capital in nature as an expense each year.

But not all of the capital expenditure. Only some of it.

Let's look at an example. Let's say you buy a factory for $2 million and expect it to last 50 years. You can deduct a portion of this every year.

The annual deduction would be:
$2,000,000 / 50 years
= $40,000 per year.

This annual deduction is what we call depreciation.

- Michael

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