Difference Between Capital Expenditure and Revenue Expenditure

The occurence of expenditure during the course of business is very natural. Generally, expenditure is incurred to increase the efficiency of business and further returns. These are braodly classified into two categories, i.e. capital expenditure and revenue expenditure. Capital Expenditure is an expense made to acquire an asset or improve the capacity of the asset. Conversely, revenue expenditure implies the routine expenditure, that is incurred in the day to day business activities.

The most important difference between capital expenditure and revenue expenditure is that the former is aimed at improving overall earning capacity of the concern, whereas the latter tries to maintain the earning capacity. Have a glance at the article, in which we’ve elaborated some more points of difference.

Content: Capital Expenditure Vs Revenue Expenditure

1. Comparison Chart
2. Definition
3. Key Differences
4. Example
5. Conclusion

Comparison Chart

Basis for Comparison	Capital Expenditure	Revenue Expenditure
Meaning	The expenditure incurred in acquiring a capital asset or improving the capacity of an existing one, resulting in the extension in its life years.	Expenses incurred in regulating day to day activities of the business.
Term	Long Term	Short Term
Capitalization	Yes	No
Shown in	Income Statement & Balance Sheet	Income Statement
Outlay	Non-recurring	Recurring
Benefit	More than one year	Only in current accounting year
Earning capacity	Seeks to improve earning capacity	Maintain earning capacity
Matching concept	Not matched with capital receipts	Matched with revenue receipts

Definition of Capital Expenditure

The amount spent by the company for possessing any long-term capital asset or to enhance the working capacity of any existing capital asset, or to increase its lifespan to generate future cash flows or to decrease the cost of production, is known as Capital expenditure. As a huge amount is spent on it, the expenditure iscapitalizedd, i.e. the amount of expenditure is spread over the remaining useful life of the asset.

In a nutshell, the expenditure which is done for initiate current, as well as the future economic benefit, is capital expenditure. It is a long-term investment done by the entity, in the name of assets, to create financial gain for the years to come. For example – Purchase of Machinery or installation of equipment to the machinery which will improve its productivity capacity or life years.

Definition of Revenue Expenditure

The expenditure which is incurred on a regular basis for conducting the operational activities of the business are known as Revenue expenditure like the purchase of stock, carriage, freight, etc.. As per the accrual accounting assumption, the recognition of revenues is done when they are earned while expenditure is recognized when they are incurred. Therefore, the revenue expenditure is charged to the Income Statement as and when they occur. This satisfies the fundamental principle of Accounting i.e. Matching Principle in which the expenses are recorded in the period of their incurrence.

The benefit generated by the revenue expenditure is for the current accounting year. The examples of revenue expenditure are as under – Wages & Salary, Printing & Stationery, Electricity Expenses, Repairs and Maintenance Expenses, Inventory, Postage, Insurance, taxes, etc.

Example

If a company deals in computers and opens a new branch at a different location for which it acquires a building. The acquisition of the building will be a capital expenditure while the purchase of computers will be a revenue expenditure. Let’s look it another way If a company is involved in property dealing business the purchase of the buildings will be a revenue expenditure while the purchase of machinery would be a capital expenditure.

Note: Here you must focus on the intention of expenditure.

Conclusion

Capital Expenditure and Revenue Expenditure both are important for business for earning a profit in the present as well as in subsequent years. Both have its own merits and demerits. In the case of a capital expenditure an asset has been purchased by the company which generates revenue for upcoming years. On the other hand, no asset is acquired as such in the case of a Revenue Expenditure.