Capital Expenditure and Revenue Expenditure
Capital expenditure is money spent on buying or improving non-current (fixed) assets that a business will use for more than one year, such as machinery, premises, vehicles and equipment; it appears on the statement of financial position as an asset.
Method
- Ask whether the item will be used by the business for more than one year (capital expenditure) or is used up within the year (revenue expenditure).
- Check whether the spending buys or improves a fixed asset, e.g. a new machine, or pays for a routine running cost, e.g. repairing that machine.
- Classify each item in a list one at a time, rather than guessing the total split first.
- Add up the capital expenditure items to find total capital expenditure, and add up the revenue expenditure items separately to find total revenue expenditure.
- Remember that capital expenditure appears as an asset on the statement of financial position, while revenue expenditure appears as a cost or expense on the income statement.
- For a classify and explain question, always give the reason for the classification, how long the item will be used, or whether it is a one-off purchase versus a recurring cost.
Worked example
A restaurant spends the following in its first month: a new oven, 6,000 pounds; ingredients for the month, 2,400 pounds; staff wages for the month, 3,600 pounds; and a delivery van, 14,000 pounds. Calculate the restaurant's total capital expenditure and total revenue expenditure for the month.
- Classify each item: the oven and the delivery van will be used for more than one year, so they are capital expenditure. Ingredients and wages are used up within the month, so they are revenue expenditure.
- Add the capital expenditure items: oven 6,000 + van 14,000 = 20,000 pounds.
- Add the revenue expenditure items: ingredients 2,400 + wages 3,600 = 6,000 pounds.
- State the answer: total capital expenditure is 20,000 pounds, and total revenue expenditure is 6,000 pounds.
Practice questions
Try each question, then tap to reveal the answer.
Q1What is capital expenditure?Show answer
Answer: Money spent on buying or improving a non-current (fixed) asset that will be used by the business for more than one year, such as machinery or premises.
Q2What is revenue expenditure?Show answer
Answer: Money spent on day-to-day running costs that are used up within the year, such as wages, rent and stock.
Q3Is buying a new shop premises capital or revenue expenditure? Explain.Show answer
Answer: Capital expenditure, because the premises is a fixed asset that the business will use for many years, not something consumed within the year.
Q4Is paying the electricity bill capital or revenue expenditure? Explain.Show answer
Answer: Revenue expenditure, because it is a recurring, day-to-day running cost that is used up within the period it relates to.
Q5On which financial statement does capital expenditure appear, and as what?Show answer
Answer: On the statement of financial position, as an asset.
Q6A business buys office furniture for 3,200 pounds and pays 1,800 pounds in staff wages in the same month. Calculate its total capital expenditure for the month.Show answer
Answer: 3,200 pounds - only the office furniture is capital expenditure; the wages are revenue expenditure.
Q7Why does the classification of an item as capital or revenue expenditure matter for calculating that year's profit?Show answer
Answer: Because revenue expenditure is deducted in full from that year's revenue, reducing profit immediately, while capital expenditure is not deducted in full in the year it is spent; its cost is instead spread over the asset's useful life through depreciation.
Exam-style questions
Written in the style of a GCSE Business exam paper, with a full mark scheme.
A landscaping business buys a new van for 16,500 pounds, spends 2,200 pounds on fuel and vehicle running costs for the year, pays 34,000 pounds in staff wages for the year, and buys new power tools for 3,800 pounds. (a) Identify which two items are capital expenditure and calculate their total. (3 marks) (b) Identify which two items are revenue expenditure and calculate their total. (3 marks)
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Explain why it matters for a small business owner to correctly classify spending as capital expenditure or revenue expenditure, rather than treating all spending the same way.
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See real GCSE Business past-paper questions, with official mark schemes →
Free printable worksheet
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