Determining capital or revenue nature is an essential step when it comes to accounting. However, both the capital nature and revenue nature are different from one another on the basis of the time for which the purchases get used.
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The capital expenditures consist of huge purchases made on fixed assets which can be used for a longer period of time. In simpler words, it means that the acquisition of the fixed assets for a longer duration of time tends to represent the expenditure’s capital nature. Consider, for example, the expenses that are made to buy the manufacturing equipment which can be used for a longer duration of time.
Furthermore, the company which provides the equipment cannot reduce the full cost and a certain amount of cost is needed to be updated depending on the year-by-year devaluation of the equipment. Generally, these are non-recurring in nature.
The Capital Expenditures are basically classified into three types:
Expenditures which are made for reducing the costs
Expenditures that are made for increasing the revenue
Expenditures that are explainable on the non-economic grounds, which refers to the expenditure made that do not have any relation to the money related to profits.
The Examples of Capital Expenditures include:
The expenses which are related to social activities
The expenditures that are made to buy machinery
The investments that are made to do research innovations and work.
Contrary to the capital nature, the revenue nature represents the short-term expenditures. The revenue nature, unlike the capital nature, is related to the expenses which are made for the operating periods in specific. Also, these expenditures neither generate any assets nor any liabilities. Consider, for example, the expenses which are made for facilitating the current operation, which include maintenance expenses, repair costs, etc.
There are basically two different kinds of Revenue Nature Expenditures.
1. Expenditures to generate Revenue:
This is a kind of expenditure which is for the already undergoing operational processes. Similarly, the operating expenditures tend to meet the running factory or business cost needs. In that same year during which these expenses occur, in the revenue expenditures, the liabilities of the tax is also lower.
2. Expenditures to maintain the Revenue-Producing Assets:
These are the type of expenditures for the ordinary and generic repairing and preservation costs. The expectations are for keeping the asset in the working condition without having to involve the increasing life and workability of the asset.
The Examples of the Revenue Expenditures are as Follows:
Salaries for the jobs.
Paying different kinds of rents for shops, houses, etc.
Insurance expenses such as life insurance, vehicle insurance, etc.
Electricity and water bill payments.
The revenue nature expenditures, unlike the capital expenditures, are recurring in nature.
Determining Capital Nature and Revenue Nature
There are a few basic considerations for determining the capital nature and revenue nature. These are as follows:
1. Nature of the Business
The capital or the revenue nature depends on the kind of business that a person does, which differs from one business to the other. For example, a business which provides car insurance to people falls under the revenue nature of expenditure, however, the manufacturer that buys machinery for his business falls under the capital expenditure.
2. Recurring Nature of the Expenditure
The capital expenses are non-recurring in nature, while the revenue expenditures have a recurring nature.
3. Purpose of the Expenses
The manufacturing procedure is an example of the capital nature whereas the repairing and renovation procedures are regarded as revenue expenditures.
Differences between Capital and Revenue Nature?
There are various differences between revenue and capital nature of expenditure. But the fundamental difference is that capital expenditures are the long-term acquisitions of fixed assets. Whereas revenue expenses are short-term that are limited to specific operating periods. Revenue expenditure are neither generated assets nor liabilities
Example for Capital Expenditure, the expenditures that are used to buy manufacturing equipment that can be used for longer durations.
Example for Revenue Nature, the expenditure to facilitate the current operation like repair costs and maintenance expenses.