Accounting basics · for students

Capital vs revenue expenditure, explained the simple way.

Every rupee a business spends is either capital expenditure (buys something that lasts) or revenue expenditure (keeps the business running today). Learn the one-question test, see a comparison table, and work through real spends classified correctly — with journal entries that tie out.

Reviewed July 2026
7 min read
CA Anil Agarwal & the TatvaBooks team

What is capital and revenue expenditure?

Every amount a business spends falls into one of two buckets. Capital expenditure (often shortened to CapEx) buys a new asset or makes a lasting improvement to one — the benefit spreads over several years, so it sits on the balance sheet and is written off slowly through depreciation. Revenue expenditure (RevEx) is spent to run the business today — rent, salaries, stationery, repairs — its benefit is used up within the year, so it goes straight to the Profit & Loss account as an expense.

Getting this classification right matters more than it looks — it decides whether an amount reduces this year's profit in full, or spreads across several years as depreciation. Get it wrong, and both your balance sheet and your reported profit are misstated.

The one-question test

Before you touch a rule book, ask one plain question: will the benefit of this spend last beyond the current accounting year?

Yes, it lasts for years — you've acquired or improved something that will keep earning for the business next year and the year after. That's capital expenditure.
No, it's used up now — the spend keeps today's operations going but leaves nothing behind for next year. That's revenue expenditure.

Here is the full comparison, side by side:

	Capital expenditure	Revenue expenditure
What it buys	A new asset, or a lasting improvement to one — benefit spreads over several years.	Runs the business for the current year — benefit is used up within the year.
Where it's shown	Balance sheet, under fixed assets (then written off gradually as depreciation).	Profit & Loss account, as an expense for the year it was incurred.
Effect on profit	Only the depreciation for the year hits profit — not the full amount.	The full amount hits profit in the year it's spent.
Recurs?	One-off, or occasional (a new machine, a building extension).	Recurring — every month or year, to keep the business running.
Examples	Buying machinery, land, a building; installation & erection charges; a major factory extension.	Rent, salaries, electricity, repairs to keep an asset as-is, stationery, freight on goods for resale.

One rule that trips up almost every student: any cost to bring a fixed asset into working condition is capital expenditure — not just the purchase price. Freight to transport the machine, installation and erection charges, trial-run costs, even legal fees on a property purchase, all get added to the asset's cost, not expensed separately.

Worked example — classifying a Nashik factory's spends

Ganpati Engineering Works, Nashik, makes these five payments in June 2026. Classify each one, then see how they're recorded.

2 Jun — Buys a new lathe machine for ₹6,00,000, paid by cheque.
2 Jun — Pays ₹40,000 freight and ₹25,000 installation charges to get the lathe running — cash.
10 Jun — Pays ₹18,000 for routine servicing of an existing machine — cash.
15 Jun — Pays monthly factory rent of ₹35,000 — cash.
20 Jun — Spends ₹1,50,000 extending the factory shed roof to add storage space — by cheque.

Transaction	Classification	Reason
Lathe machine, ₹6,00,000	Capital	New fixed asset — benefit spreads over its working life.
Freight + installation, ₹65,000	Capital	Cost to bring the asset into working condition — added to the machine's cost.
Routine servicing, ₹18,000	Revenue	Just maintains existing capacity — no lasting improvement.
Factory rent, ₹35,000	Revenue	Recurring cost of running the business this month.
Shed extension, ₹1,50,000	Capital	Permanent addition to the building — increases its capacity for years to come.

Now the journal — the lathe's purchase price and its freight/installation are combined into one Machinery account, because both form part of the asset's cost:

Date	Particulars	Debit ₹	Credit ₹
2 Jun	Machinery A/c Dr. To Bank A/c (Lathe machine purchased by cheque)	6,00,000	6,00,000
2 Jun	Machinery A/c Dr. To Cash A/c (Freight ₹40,000 + installation ₹25,000 capitalised)	65,000	65,000
10 Jun	Repairs & Maintenance A/c Dr. To Cash A/c (Routine servicing — revenue expense)	18,000	18,000
15 Jun	Rent A/c Dr. To Cash A/c (Factory rent for June)	35,000	35,000
20 Jun	Factory Building A/c Dr. To Bank A/c (Shed extension — permanent addition)	1,50,000	1,50,000
	Total	8,68,000	8,68,000

Total debits and credits both come to ₹8,68,000 — the books balance. Of this, ₹8,15,000 (₹6,00,000 + ₹65,000 + ₹1,50,000) is capital expenditure sitting on the balance sheet as fixed assets, and only ₹53,000 (₹18,000 + ₹35,000) reduces this month's profit as revenue expense. If Ganpati had wrongly expensed the whole ₹8,68,000, June's profit would be understated by ₹8,15,000 — and the balance sheet would be missing that much in assets.

Common mistakes & student tips

Freight and installation on a new asset are capital, not revenue. The single most common exam trap — these costs get added to the asset's cost, never expensed on their own.
"Repair" isn't always revenue. Routine repair that just maintains the asset is revenue expenditure; a major overhaul that extends life or adds capacity is capital expenditure.
Size of the amount doesn't decide it — nature does. A ₹500 spend that buys a lasting asset is still capital; a ₹5,00,000 recurring cost is still revenue. Don't judge by the rupee value alone.
Preliminary and pre-operative expenses (registration fees, expenses before the business starts) are often treated as capital in nature and written off over a few years — flag these separately.
Always check both statements. If an item is capital, it should appear on the balance sheet as an asset (with depreciation in the P&L); if revenue, it appears only in the P&L.

In TatvaBooks this happens automatically

Learning the capital-vs-revenue test by hand is essential — it's the judgement every accountant needs. But in day-to-day bookkeeping, you shouldn't have to remember it for every single bill. In TatvaBooks, when you record a purchase you simply tag it as a fixed asset or an expense; the software books the correct ledger entry, adds freight and installation to the asset cost when you mark them so, and runs depreciation automatically each year — keeping your balance sheet and profit figure accurate without a manual reclassification exercise at year-end.

It's cloud-based, GST-first and free to start. See how on the cloud accounting software and GST billing software pages.

Frequently asked questions

What is the simplest test to tell capital and revenue expenditure apart?

Ask: does the benefit of this spend last beyond the current accounting year? If yes — you've bought or improved something that will still be earning for you next year and the year after — it's capital expenditure, and it goes on the balance sheet. If the benefit is used up within the year — rent, salaries, repairs that just maintain what you already have — it's revenue expenditure, and it goes to the P&L account as an expense.

Is repair of machinery capital or revenue expenditure?

Ordinary repair that keeps a machine running as before (say, replacing a worn belt or routine servicing) is revenue expenditure — it just maintains the asset's existing earning capacity, so it's expensed in the P&L for that year. But a major overhaul that increases the machine's capacity, extends its useful life significantly, or upgrades it beyond its original condition is capital expenditure — it's added to the asset's cost on the balance sheet and depreciated over future years.

Are installation and erection charges capital or revenue expenditure?

Capital. Any cost incurred to bring a fixed asset into a usable, working condition — freight to bring the machine to your factory, installation labour, erection charges, trial-run costs, even the legal fees to register a purchased property — is added to the cost of the asset itself, not expensed separately. This is a very common CA-Foundation exam trap: students often expense freight-inward on a new machine when it should be capitalised.

What happens if capital expenditure is wrongly treated as revenue expenditure?

Profit for the year gets understated (because you've expensed the full amount instead of just one year's depreciation), and the balance sheet understates assets by the same amount. This also distorts every future year's depreciation and profit, since the asset was never capitalised in the first place. Auditors specifically test for this misclassification because it can be used to manipulate reported profit.

Is GST paid on a fixed asset purchase capital or revenue expenditure?

It depends on whether you can claim input tax credit (ITC). If your business is GST-registered and eligible to claim ITC on the asset, the GST amount is not part of the asset's cost — it's recorded separately as ITC receivable and adjusted against your output GST liability. If ITC cannot be claimed (say, the asset is used for exempt supplies, or it's a blocked credit like a motor car in most cases), the GST becomes part of the asset's cost and is capitalised along with the purchase price.

Keep going.

Accounting basics

Go deeper

Do it in software

Free on Solo · no card · India-hosted

Let the software classify capital and revenue for you.

Tag a purchase as an asset or an expense, and TatvaBooks books the correct entry, capitalises freight and installation, and runs depreciation automatically. Built by Chartered Accountants.

Start free on Solo See cloud accounting