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Determining Capital or Revenue Nature

Last updated date: 28th Feb 2024
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Capital Nature and Revenue Nature

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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Capital Nature

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:

  1. Expenditures which are made for reducing the costs

  2. Expenditures that are made for increasing the revenue

  3. 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.

Revenue Nature

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:

  1. Salaries for the jobs.

  2. Paying different kinds of rents for shops, houses, etc.

  3. Legal expenses.

  4. Advertising expenses.

  5. Insurance expenses such as life insurance, vehicle insurance, etc.

  6. 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.

FAQs on Determining Capital or Revenue Nature

1. What is capital expenditure and what is its type?

Capital expenditures consist of big purchases of fixed assets that are used for a longer period. For example, the expenditures that are used to buy manufacturing equipment that can be used for longer durations.

Also, the company providing the equipment does not deduct the whole cost and the cost should be updated year by year based on the devaluation of the product. 

Capital expenditures are classified into three sections. They are,

  • Expenditures to reduce cost.

  • Expenditures to increase revenue.

  • Expenditures explainable on non-economic grounds.

2. What is the revenue nature and what is its type?

It is totally different from capital nature, short-term expenses denote the revenue nature. Unlike capital nature, this is related to expenditure that is made for specific operating periods. This kind of expense neither generated assets nor liabilities. For example, the expenditure to facilitate the current operation like repair costs and maintenance expenses.

Revenue nature expenditure is of two types:

  • Expenditure for generating revenue: This expenditure is for ongoing operational processes. Similarly, the operating expense meets the factory cost requirements. 

  • Expenditure for maintaining the revenue-producing assets: The expense for general repair and preservation costs is revenue expenditure. The expectations are to keep the assets in working condition without any involvement in increasing the life and workability of the asset.

3. What are the basic considerations to determine the nature of financial transactions?

The capital or revenue nature is completely based on the type of business. It differs with respect to different business types. For a business selling car insurance comes under the revenue nature whereas the manufacturer buying the machine for his factory comes under capital expenditure.

Recurring Nature of Expenditure

Revenue nature expenditures are recurring whereas the capital nature expenditures are non-recurring in nature.

Purpose of Expenditure

Manufacturing is an example of capital nature whereas repairing and renovation come under revenue nature.

4. What is the difference between capital expenditure and revenue expenditure?

The capital expenses are related to the fixed assets that are expected to be productive assets for a longer duration of time. On the other hand, the revenue expenses are for the costs which are related to the specific revenue transactions or for the operating periods like the maintenance and repair expenses or the cost of the sold goods. The difference between both the capital expenditure and the revenue expenditure is as follows:

1. Timing: Capital expenses are charged for gradual expense through depreciation and for a longer period of time. The revenue expenses are charged for the expenses in the current period or even shortly thereafter.

2. Consumption: The capital expenditure assumes to be consumed during the useful life of the fixed asset. The revenue expenditure is assumed to be consumed within a shorter period of time.

3. Size: The capital expenditure involves a greater monetary amount than the revenue expenditure because an expense is only considered as a capital expenditure if it tends to exceed a specific threshold value. If not then it automatically is considered as the revenue expenditure. However, there are many larger expenditures as well which are considered to be revenue expenditures if they are period costs or are directly associated with the revenue transactions.

5. What are direct and indirect expenses?

Revenue expenditures can be classified into two groups which are direct expenses and indirect expenses.

1. Direct Expenses:

These are the kind of expenses that incur mostly via the production procedures. Some of the most common direct expenditures are freight charges, direct wages or salaries, rents, commission, bills, legal expenses, import duties, and many more.

2. Indirect Expenses:

The indirect expenses are the ones which pertain to the distribution and sale of the finished services and goods. These include repairs, commission, interest, selling salaries, taxes and rent, etc. these kinds of expenses also tend to include the money which is spent for the management of the recurring administrative expenses.