Key Idea: Finance is the money a business uses to start, survive and grow. At HL, Topic 3.1 still covers the same foundations as SL, but students are expected to classify finance-related items more precisely and use that distinction accurately in case-study analysis and accounting contexts.
🏗️ Capital expenditure: Spending on **long-term assets**. Usually lasts **more than 1 year**. Examples: machinery, vehicles, buildings, IT systems. Shown on the **balance sheet / statement of financial position**.
🔄 Revenue expenditure: Spending on **day-to-day running costs**. Used up **within 1 year**. Examples: wages, rent, utilities, advertising, inventory purchases. Shown in the **income statement / profit and loss account**.
Profit ≠ cash flow. This is one of the most important finance ideas in the whole course.
HL exam tip: In finance questions, do not just label an item as capital or revenue. Explain why it belongs there and what that means for the business or the accounts.
Past-paper tip: HL finance markschemes reward precision. Use the exact business term, show working when relevant, and include the correct sign or label where needed.
Important: Common trap: students see a physical asset and assume the cost must be capital expenditure. That is wrong for repairs, servicing and maintenance.
- Identify if the question is about purpose of finance or expenditure type
- Use precise terms: start-up, operating, expansion, capital, revenue
- Explain clearly in 1–2 sentences
- Apply to the business in the case
- Ask: does this create a long-term asset or support current operations?