Capital Expenditure vs Revenue Expenditure
Expenditures are unavoidable for any company to exist in the competitive market, to expand the business or to find new opportunities to open up beneficial business in those areas, etc. Expenditure is defined as payments of cash or cash equivalent for goods or services, or a charge against available funds in settlement of an obligation as evidenced by a source document like invoice, voucher, receipt, etc. All payments made by a company can be broadly categorized into capital expenditure and revenue expenditure.
What is Capital Expenditure?
An amount spent to acquire or enhance a productive asset to increase the capacity or efficiency of a company for more than an accounting period is defined as capital expenditure. That is, simply, capital expenditure is the expenditure made with the intension of getting the benefit from that expenditure for more than one year (usually accounting period is one year). For example, amount spent on long-term assets like machinery, plants, buildings, etc, either to improve or to acquire, is capital expenditure. Normally capital expenditure is capitalized in the books of accounts and then that amount will be depreciated over the useful life of the assets. It is also known as capital spending. It is essential to understand the differences between capital expenditure and revenue expenditure as the accounting treatments are different.
What is Revenue Expenditure?
Cash or resources spent on sales revenue generation or for maintaining a revenue-generating asset is defined as revenue expenditure. Revenue expenditure is an expenditure, which is made with an intension of getting some benefits within a short period of time (mostly, less than a year). Revenue expenditures are recurring in nature such as expenditure to run the day-to-day business of the company. Purchase cost of goods, wages for workers, administration expenses, routine expenditure on repairs and maintenance, and service charges are some examples for revenue expenditure. These examples giving the feel of matching revenue expenses with the revenue earned during the same period is rational. Revenue expenditure is also known as expenses and expired costs.
What is the difference between Capital Expenditure and Revenue Expenditure?
Both capital expenditures and revenue expenditures are crucial for a company to run successful and profitable business. However, both types of expenditures have some differences that distinguish one from the other.
• Capital expenditures can be capitalized and depreciated over the useful life of the asset, while revenue expenditures must be expended on the statement of comprehensive income (Profit or loss account) for the accounting period in which it has occurred.
• Revenue expenditure is recurring in nature, while capital expenditure is not.
• Capital expenditures are made for a period more than one accounting period, but revenue expenditures are made for one accounting period.