Capital and Revenue Expenditure

Introduction

Capital Expenditure is the amount of money that a company spends on acquiring new assets. Capital expenditure is the amount a company pays to acquire or upgrade long-term assets such as property, plant and equipment. The cash spent on purchasing these assets is recorded as an expense in the incurred period. Capital expenditures are reported on the balance sheet under “fixed assets,” “intangible assets” and “equity investments.” Capital expenditures are recorded as expenses in the period they were incurred and reported on the balance sheet under fixed assets, intangible assets and equity investments. 

Revenue expenditure is the money spent on goods and services used to generate revenue. This type of expenditure is calculated by subtracting the cost of goods sold from the total income and then adding back in the price of goods sold. 

Expenditure is categorised into: 

Capital Expenditure: The purchase of fixed assets used in production or research, such as land, buildings, machinery, vehicles and equipment. 

Examples: 

• A company may spend money on machinery and equipment to increase its production capacity. 
• A company may spend money on vehicles to transport goods from one place to another. 
• A company may spend money on office space, which can be used for storage or as a sales office. 

The following are the rules for determining the capital expenditure: 

• The cost of acquiring a property or other asset is capital expenditure. 
• Expenditure on repairs and maintenance of an asset is not considered a capital expenditure but an operating expense. 
• Expenditure on acquiring machinery, equipment and vehicles is capital expenditure. 
• Expenditure on intangible assets such as goodwill, patents, copyrights, etc., are also considered capital expenditures. 
• Capital allowance cannot be deducted from income before calculating taxable income under CIT Act 1961. 

Revenue Expenditure: The purchase of products and services consumed or used during one financial year. 

Examples : 

• Advertising expenses 
• Cost of goods sold 
• Salaries and wages 
• Rent expense 

The rules for determining revenue expenditure include: 

• The revenue expenditure should be related to the business of the company. 
•  Revenue expenditure should not be capitalized. 
• Revenue expenditure should not be recorded as an asset on the balance sheet. Still, it can be registered as a current liability on the balance sheet is provided in full and will not need to be paid out later in cash or cash equivalents. 
• Revenue expenditures that a company incurs to earn revenue should not be recorded as an expense on the income statement (unless they are one-time and nonrecurring). 

Deferred revenue expenditure: Deferred revenue expenditures will not be used up within the current accounting period but will be used up in future accounting periods. 

Examples : 

• Rent expense for office space 
• Interest expense on loans 
• Costs for repairs and maintenance 

Difference between Capital and Revenue Expenditure 

• Capital expenditure is the cost incurred by a company in acquiring, constructing, or installing fixed assets. Capital expenditure is usually for assets used for more than one year. 
• Revenue expenditure is an expense incurred by a company to provide goods or services to customers. These are usually short-term expenses. 
• Capital expenditures are generally considered to have a higher value than revenue expenditure because they are more likely to impact revenue and can be depreciated, whereas revenue expenditures cannot be declined. 
• Capital expenditures are also more visible because they typically require some physical presence, whereas revenue expenditures often do not require any physical presence. 

Capital expenditure accounting treatment 

• The capital expenditure account comprises two sub-accounts: The fixed asset account, which records the purchase price of fixed assets (e.g., manufacturing equipment).
• The accumulated depreciation account records the depreciation expense on fixed assets. 
• The capital expenditure account is used to track the value of an asset and is also used to calculate the book value of an investment. 
• The capital expenditure account is used on the income statement to reduce net income by calculating depreciation expenses on fixed assets. It can also be used as a credit on cash flow statements when it reflects an increase in the book value of an investment. 

 Revenue expenditure accounting treatment 

• The Revenue Expenditures Accounting Treatment is a way to record the revenue and expenses of a company for taxation. 
• This method records all income and expense items on the income statement as recorded in the financial statements. 

Conclusion

Companies are not spending too much on capital expenditures and not enough on revenue expenditures.  Some companies spend too much on capital expenditures and not enough on revenue expenditures. It can be a problem for the company because they might have to take out loans to cover the difference, which they should avoid. The fixed asset and accumulated depreciation accounts are subparts of the capital expenditure. Capital expenditure is mainly used for improving the value of assets and is also used to calculate the depreciation value of assets. The primary purpose of the Revenue expenditure is the process of taxation and it is considered as a less value than the Capital expenditure.