To understand the topics of capital expenditures and revenue expenditures, first of all, it is very prime to go through the meaning of expenditure itself. Expenditure is primarily spending of money or funds for buying or availing service. It can be an exchange of valuable things in exchanges for foods and services also. It is a procedure of acquiring commodities by liability. Expenditures and expenses are quite identical words but expenditure simply denotes the acquiring of assets while the deduction in the value of assets is shown by expenses.
Types of Expenditure
Expenditure is basically subdivided into two types that are capital and revenue expenditure.
This refers to the money spent to buy, maintain or in enhancement in fix assets such as land, building, apparatus, automobile. This outflow of money is known as capital expenses or capital expenditure.
There are many sub-types of capital expenditure, such as:
Cash money spent on business purposes.
Purchasing of Plants and machinery items
Electric power equipment
Permanent additions to existing fixed assets
In distinction to capital, revenue expenditure is money spent in accounting period or duration, when the expenditure takes places. Recurring or revenue expenditure happens after a fixed asset (after purchase and installation) which is performing consistently and is serviced or repaired to make it work consistently in future as well. It usually comes into discussion during circumstances of fixed assets.
In contrast to the capital expenditure revenue expenditure is not gradient and stays constant in revenue expenditure. No further benefits are available as the assets get consumed in an accounting year. It is basically a recurring type of expenditure. There are two subtypes of revenue expenditure:
Direct expenditure includes the price of raw material and to turn it into a finalized product.
Indirect expenditure relates to selling and distribution of goods rather than manufacturing.
Difference between Capital Expenditure and Revenue Expenditure
To differentiate between capital expenditure and revenue expenditure is very important when it comes to studying the concept of expenditure.
Each method has its own advantages and shortcomings that are separate. When we go through capital expenditure and revenue expenditure difference, we will actually be clarifying both the concepts and their variations as well.
Revenue expenditure is a regular money investment that does not cause any welfare in business neither leads to a loss in any means. On the other hand, talking about capital expenditure is long time money investment that only benefits business.
The points given below further distinguish between capital expenditure and revenue expenditure:
Capital expenditure is incurred in obtaining or enhancing permanent assets and is not meant for exchange. They may add value to the existing ones. But, revenue expenditure is a routine expenditure that incurs in the normal coerces of business and includes the cost of sales and maintenance of fixed assets.
Capital expenditure increases earning capacity and revenue expenditure maintain the earning capacity.
Capital expenditure produces benefits over several years. Thus, small parts of income statements are subjected to change leading to the deprecation and the rest appears in the balance sheet. Revenue expenditure is consumed within an accounting year i.e. benefits of only one year is of concern here. Thus the entire amount is changed into the income statement and it does not appear in the balance sheet. This is one point worth mentioning when asked to distinguish between revenue expenditure and capital expenditure.
Examples of Capital Expenditure and Revenue Expenditure
When you have successfully learnt how to distinguish between capital and revenue expenditure, it is now time for more clarification. To do that, we bring to you some general examples of sub-types of expenditure:
Examples of Capital Expenditure:
Buying of property, plant and equipment
Raising long term finance associates with paying fees
Improvement of assets and making more additions to them; installing an air conditioner or extension of an existing building are examples of such expenditure.
Example of Revenue Expenditure:
Buying of goods meant for resale in the normal course of business.
Expenditure is made to sell and distribute among customers.
Buying unprocessed material and components used to manufacture goods.