Classify capital and revenue receipts and expenditure
Separate money from ordinary trading from capital receipts, and distinguish assets from period costs.
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. These lessons cover Topic 1.3 only. Practice is self-checked, not an official Cambridge grade; the separately published 2029 syllabus, timed papers and human subject-teacher review remain outstanding.
Before you begin
- Topics 1.1 and 1.2 introduce business resources, equity, double entry and period profit. Use those ideas when recording non-current assets.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A business receives money from a new bank loan. Is this revenue from sales?
What you will learn
- Classify capital and revenue expenditure
- Distinguish capital receipts from operating revenue
- Explain the effect of misclassification on profit and assets
Match expenditure to the resource or period
Capital expenditure acquires or improves a non-current asset expected to support the business over more than one accounting period. Revenue expenditure is incurred in running the business during a period, such as routine repairs, wages or utilities.
A description alone can mislead: replacing a small broken part may be a repair, while a major improvement may increase an asset's capacity or useful life. Use the purpose and effect of the spending rather than its size alone.
Receipts are not all revenue income
Revenue income is earned from ordinary activities, such as selling goods or providing services. Capital receipts include amounts from financing or disposing of long-term resources, such as a share issue, a loan or sale of equipment; they are not sales revenue.
If capital expenditure is recorded as a revenue expense, the period expense is too high, profit too low and non-current assets too low. If revenue expenditure is capitalised, profit and assets may be overstated.
Pause and explain
What may happen if the cost of a machine is wrongly recorded as a revenue expense?
Worked example
A delivery company buys a van for $24,000, pays $600 for routine servicing and receives $8,000 from selling an old van. Classify the three amounts.
Show the worked solution
- The new van is an asset used over several periods: capital expenditure.
- Routine servicing maintains current operations: revenue expenditure.
- The old van's sale is a disposal receipt, not sales revenue from ordinary delivery work.
Answer $24,000 is capital expenditure, $600 is revenue expenditure and $8,000 is a capital receipt from disposal. Any gain or loss on disposal is calculated separately from the proceeds.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A shop buys shelving for $4,800 to use for five years and pays $120 for a monthly cleaning service. Classify each cost.
Give me a hint
Ask whether the cost creates a longer-term resource or supports this period's operations.
Compare my reasoning
- Shelving is a resource used over several periods.
- The cleaning service supports current operations for one month.
- Classify the shelving as capital expenditure and cleaning as revenue expenditure.
Shelving: capital expenditure of $4,800. Cleaning: revenue expenditure of $120.
Look for these in your work
- Long-term resource identified
- Period service identified
- Both categories correct
A business receives $30,000 from issuing shares and $18,000 from ordinary product sales. Which amount is revenue income?
Give me a hint
Identify which inflow was earned through ordinary operations.
Compare my reasoning
- The product sales arise from the business's ordinary activity.
- The share issue is a financing receipt from owners.
- Do not include the share issue in sales revenue.
$18,000 is revenue income from sales. The $30,000 share issue is a capital receipt.
Look for these in your work
- Ordinary income identified
- Financing receipt distinguished
- No false sales figure
A firm capitalises $2,000 of routine repairs. State the likely direction of error in the current period's profit and asset figure.
Give me a hint
The repair is a current-period cost but has been put on the asset side.
Compare my reasoning
- The revenue expense is omitted or understated by $2,000.
- Profit is therefore likely overstated by $2,000 before other adjustments.
- Non-current assets are likely overstated by the amount wrongly included, before depreciation.
Profit and non-current assets are likely overstated by $2,000 before any later depreciation or other adjustments.
Look for these in your work
- Expense effect identified
- Profit direction correct
- Asset direction correct
Common mistakes
- Classifying an item only by its amount
- Including a loan or asset-disposal receipt in sales revenue
- Ignoring how a misclassification changes both profit and asset balances
What can you explain now?
A business pays for a routine annual service on a machine. How is the cost normally classified?
Compare with the explanation
Revenue expenditure
Routine servicing is a period cost that maintains operations.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Give one example of capital expenditure and one example of revenue expenditure.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.