CAPITAL EXPENDITURE AND REVENUE EXPENDITURE-ALL YOU NEED TO KNOW

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.

Differences Between Capital and Revenue Expenditure

1. Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only.
2. 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.
3. 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.
4. Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is not capitalized.
5. Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure is a short term expenditure.
6. 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.
7. Capital expenditure is not matched with the capital receipts. Unlike revenue expenditure, which is matched with the revenue receipts.