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
|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|
|Shown in||Income Statement & Balance Sheet||Income Statement|
|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.
Key Differences Between Capital and Revenue Expenditure
- Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only.
- The major difference between the two is that the Capital expenditure is a one-time investment of money. On the contrary, revenue expenditure occurs frequently.
- Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income Statement (depreciation), but Revenue Expenditure is shown only in the Income Statement.
- Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is not capitalized.
- Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure is a short term expenditure.
- Capital Expenditure attempts to improve the earning capacity of the entity. On the contrary, revenue expenditure aims at maintaining the earning capacity of the company.
- Capital expenditure is not matched with the capital receipts. Unlike revenue expenditure, which is matched with the revenue receipts.
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.
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.