Difference between Capital Expenditure and Revenue Expenditure

It is natural for every business to incur expenses during its existence. In business, these costs are usually referred to as expenditures. Typically, a business incurs expenditure to increase its efficiency and further returns. Business expenditures are categorized into capital and revenue expenditure.

This article will discuss the two in details and further analyze the critical differences between them.

What is Capital Expenditure?

Capital Expenditure is a business expense that is made to acquire an asset or to improve the capacity of an asset. Therefore, it is the amount of money spent by a company to purchase a long-term capital asset or to boost the operating capacity of an existing capital asset.

Capital expenditure is made to grow the business and increase profits and decrease the cost of production. As such, capital spending aims to take care of the future economic benefits of a company. You will be right to think of it as a long-term asset investment doneby a business to create financial gain for the years to come. For instance, a company can purchase machinery or install new machinery equipment to improve productivity capacity and eventually increase profits.

What is Revenue Expenditure?

Unlike capital expenditure, revenue expenditure involves the expenses incurred in a business daily operating activities. Therefore, it is expenditure incurred on a regular basis. Revenue expenditures are simply normal business expenses – business costs incurred during normal business operations. They are also recognized immediately

For example, stationery, printing, electricity costs, wages and salary, postage, insurance, repairs and maintenance, inventory, taxes, etc. As such, revenue expenditure is charged to the Income Statement when it occurs.

 Differences between Capital Expenditure and Revenue Expenditure

The most significant difference between revenue and capital expenditure is that the capital expenditure is meant to improve the general earning

capacity of business and revenue expenditure is aimed at maintaining that earning capacity. To understand the main differences between the two, they have been further elaborated on the following points. Have a glance, here are nine major differences between capital and revenue expenditure.

1. Term:

   Capital expenditure is a long-term expenditure and therefore has a long-term effect on the business. It is not exhausted within a current accounting year. Additionally, its benefits will be received for some years. Conversely, revenue expenditure is short-term. Its benefits are received within the current accounting year.

2. Value:

   Capital expenditure sees to it that an asset is procured or the value of an existing asset is improved. With revenue expenditure, neither the acquisition nor value enhancement of an asset is done.

3. Physical Existence:

   Capital expenditure has a physical existence except for intangible assets. On the other hand, revenue expenditure has no physical presence as it is incurred on business items used in daily business operations.

4. Occurrence:

   Capital expenditure is non-recurring, unlike revenue expenditure which is regular and occurs repeatedly.

5. Progression:

   Capital expenditure helps a company progress the business while revenue expenditure helps maintain the business.

6. Amount Shown:

   A portion of capital expenditure is usually shown in Trading, Profit and Loss account and the balance shown on the asset side in the balance sheet. With revenue expenditure, the whole amount is always shown in an income statement or the trading Profit and Loss account.

7. Balance Sheet:

   Capital expenditure is indicated on the balance sheet until its benefits are thoroughly exhausted. Contrariwise, revenue expenditure is not shown on the balance sheet

8. Capitalisation:

   Capital Expenditure is capitalized, unlike revenue expenditure, which is not capitalized.

9. Revenue:

   Capital expenditure does not reduce the revenue of the business. Fixed asset acquisition does not affect business revenue. Revenue expenditure impacts and reduces the business profits.

Summary of Capital Expenditure and Revenue Expenditure

As a businessperson, it is essential to understand both capital and revenue expenditure. Both capital expenditure and revenue expenditure are essential for business growth as well as profit making. Both help the business earn profits in present in and in following years. Both have benefits for business. With a capital expenditure, a company purchases an asset, which helps, generates profits for the future. Conversely, no asset is attained with revenue expenditure, but it helps maintain daily business processes.

Sharing is caring!