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Capital Expenditure is an expenditure that provides an advantage to the business for many future years or many future accounting periods. Capital expenditure in simple terms refers to expenses incurred in the acquisition of assets like the land, plant, machinery, vehicles, patents, copyrights, etc. The advantages of these expenditures are used by the business for more than one year.
Revenue expenditure is an expenditure that does not come under capital expenditure. Revenue expenditure is incurred in the current accounting period. The advantages of the revenue expenditure are used in that period itself. Expenses such as rent, wages, carriage, salaries, postage, insurance, advertising, etc. are revenue expenditures.
CAPITAL EXPENDITURE
Capital expenditures refer to the resources that are utilized by a company for the acquisition, development, or conservation of non-current assets to enhance the effectiveness or capacity of the company. Non-current assets or long-term assets are generally tangible, fixed, and depreciable assets such as property, equipment, or building, and have a valuable life of more than one accounting period.
The expenditure incurred in an accounting period are recorded in the cash flow statement of the business. Capital expenditures generally have a significant effect on the short-term and long-term financial position of an organization. Therefore, making appropriate Capex decisions is of vital importance for the financial health of a company.
Various companies normally try to maintain the levels of their past capital expenditure to show the users of the financial statement that the managers of the company are interested to invest in the growth of the business.
EXAMPLES OF CAPITAL EXPENDITURE
Capital Expenditures are the expenses of the firm which give the firm long-term benefits. Examples of these expenditures are the acquisition of tangible assets like land and building, machinery, etc., and also the acquisition of intangible assets like trademarks, patents, licenses, etc. The costs included in bringing the assets to their location and condition as intended by the management are also recorded as capital expenditure. Capital Expenditures are one-time expenses and thereby recorded in the Balance Sheet of the firm.
REVENUE EXPENDITURE
Revenue expenditures are the expense that is incurred in the business for the production of its products and services. In other terms, it refers to expenditure used in the daily operations of the firm. However, revenue expenditure is a specific type of operational expenditure.
Revenue expenditure simply means those expenses that are important for creating revenue within the same accounting period in which expended.
EXAMPLES OF REVENUE EXPENDITURE
Revenue Expenditures of a business incurred in a particular accounting period are reported in the Statement of Profit or Loss or simply in the Income Statement of the firm. Examples of such expenditures include salaries of the employees, rent and rates, depreciation charged on fixed assets, freight charges, etc. Revenue Expenditures of the firm are incurred for day-to-day operations of the firm and are thereby not recorded in the Balance Sheet of the firm.
DIFFERENCES BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE
Properties | Capital Expenditure | Revenue Expenditure |
Based on Usage | Capital expenditure is used for a longer period as compared to revenue expenditures. Capital Expenditures are used till the asset has reached its end of life or till the time it is useful. For illustration, machinery is used for several years till the time it can function properly. Acquisition of machinery is not a recurring expense as your business needs to pay for the cost of the machinery only once and therefore it is capitalized in the Balance Sheet. | Revenue expenditure is used for a short period. For example, the costs incurred in regular maintenance of equipment which is done monthly or every quarter depending on the type of equipment used for the production of goods is a recurring expense charged as revenue expenditure. Revenue Expenditures incur over particular periods during an accounting period. |
Based on Function: | Capital expenditure or Capex is the expense that is required to acquire a capital asset. The assets acquired are long-term assets that are used to enhance the efficiency of the organization. Examples of capital expenditures include vehicles, computer equipment, land, fixtures, software, office buildings, and so on. | Revenue expenditure is the expense that is incurred for the daily operations of the business. It includes the costs used to oversee the proper functioning of a fixed asset such as their repair costs, maintenance costs, and costs that are incurred for current operations on a daily basis. Examples of revenue expenditure include rent, salaries and wages, and office supplies. |
Based on Purpose: | The purpose of capital expenditure is to produce more revenue over time. It includes the expansion of the business and investing in non-current assets that will give a return on investment and long-term gain. For example, a machine acquired for a manufacturing plant can be purchased to improve current efficiency so that it can contribute to the expansion of revenue generation. Capex is incurred before the business starts to operate. | The purpose of revenue expenditure is to see that the assets such as machinery are functioning at their optimum value at all times. These expenses are considered after the business has started to operate. These expenditures are used to run the activities of the business. Revenue expenses do not add more efficiency to the business like the capital expenditures but ensure that the capital assets are working as per the needs of the management. |
Based on Disclosure: | Capital expenditure is disclosed in the cash flow statement and the balance sheet of the business. In the balance sheet, capital expenditures are recorded as fixed assets on the asset side of the Balance Sheet. Capital expenditures are not instantly charged as an expense, they are gradually charged as an expense in the name of depreciation as an expense in the Income Statement. | Revenue expenditure is disclosed in the income statement of the financial statements of the business as and when the expenses are incurred. These are recurring expenses and are not disclosed in the balance sheet. Revenue expenditures are charged instantly in the current period in which they are incurred or after a short period. |
Based on Cost: | Capital expenses are generally higher as compared to revenue expenses. They are incurred only once during the acquisition of the capital assets and involve a large amount of outflow of cash as it relates to investment that will provide future economic benefits to the company. | Under revenue expenditure, the cost incurred is comparatively lower than that of capital expenditures. Revenue expenditure is not the expense related to investment so it is generally smaller. However, in certain situations, the expense related to revenue expenditures can be large if the cost is periodic or it is an expense related to the revenue. |
CONCLUSION
In this article, we have learned about capital expenditure as the expenditure incurred on capital assets. The expenses incurred in the acquisition of tangible and intangible assets are examples of capital expenditure. Revenue expenditure has also been discussed as the expenditure incurred on the day-to-day operations of the business. The expenses incurred on payment of salary, rent, etc. are examples of revenue expenditure.
We have also discussed the differences between capital expenditure and revenue expenditure such as that capital expenditures are long-term expenses whereas revenue expenditures are short-term expenses. Capital expenditures are disclosed in the Balance sheet whereas revenue expenditures are disclosed in the Income Statement of the business.
