Every organisation, firm, company and even the Indian Government incurs several forms of expenditure for various reasons. Some of these reasons include generation of higher revenue and others may involve investment strategies to bolster maintenance or finance business expansions which would help the entire organisation in the long run.
So, when companies prepare their upcoming calendar budget, they categorise it into two parts, i.e. expenditure and receipts, which can be further subdivided into its revenue and capital variants.
The primary concern for companies and organisational bodies in incurring expenditure is to improve the overall efficiency of the business, which in turn transcends to increased profit returns. In the branch of commerce, understanding the difference between capital expenditure and revenue expenditure helps students to realise the fundamentals of the budget allocation of a company, firm, or an entire nation.
What is Capital Expenditure?
Capital Expenditure also referred to as CapEx, is regarded as the funds used by a company, firm, enterprise or an organisation to acquire, upgrade and maintain its fixed assets. Such assets include its PP&E (i.e. its Plants, Property and Equipment) which are mainly, workstations, machinery, infrastructure, etc. Such assets are usually long-term and offer productivity for more than one accounting period.
When any enterprise or organisation makes investments on assets for generation of profit in the days to come, such expenditures are mainly capital in nature. Through capital expenditure, companies and firms can buy new equipment or even use it for maintenance of assets.
Examples of capital expenditures include the following –
Office buildings (expenses concerning acquisition and sustenance of a building/s)
Workplace equipment like computers, printers, coffee machines, furniture, other appliances, etc.
Patents, copyrights, trademarks, etc.
Since such assets offer income-generating value for an organisation for a certain period, organisations are not allowed to subtract the total cost of the asset in the year when such capital expenditure is incurred. Instead, the organisation must recover the cost of such assets by annual depreciation over the years the asset is being of use to the organisation.
What is Revenue Expenditure?
Revenue Expenditure also referred to as Income Statement Expenditure, are considered as those expenses which are incurred on a day to day basis. In simple terms, it is the total amount of expenses of a company, firm or an organisation incurred for maintaining its earning capacity.
In the case of Revenue Expenditures, the costs are related to those assets which are not capital in nature since they do not offer financial benefits beyond the current accountable year. It means that companies or firms incurring such expenditure recognises these costs and post them in full on the Income Statement in the year of their occurrence.
Moreover, Revenue Expenditures can be categorised into two types which are –
Expenditures for Revenue Generation
Such expenditures include those day-to-day expenses that are required to run a business efficiently.
Expenditures for Maintenance of Revenue-Generating Assets
Such expenditures include repair and maintenance of assets which are estimated to generate revenue for the current accounting year and beyond.
Examples of revenue expenditures include the following –
Cost of supplies
Marketing and advertising costs of the organisation
Commissions paid to executives and franchises
Telecommunication expenses of the company
A broader example which will help to distinguish between revenue expenditures and capital expenditures can be done with the example of a purchase of a storage facility of a company. The funds required for the purchase of the storage facility is considered a capital expenditure. In contrast, the painting and refurbishing costs are denoted as revenue expenditure since it does not promote the asset in generating more income.
Difference Between Revenue Expenditure and Capital Expenditure
To develop a clear understanding of the essential differences between capital and revenue expenditure, consult the details tabulated below –
At Vedantu, we hope that the above discussion on the differences between revenue and capital expenditure has helped to instil a clear idea on the topic. We offer study material on other chapters of Class 11-12 Commerce. Make sure to visit our official website to join our fun and interactive learning program!
1. What are Capital and Revenue Expenditure? State Examples
The expenses incurred by an organisation to acquire, maintain or expand its revenue-generating assets are known as capital expenditure, whereas the expenses incurred by an organisation to maintain its earning capacity is regarded as revenue expenditures. Examples of Capital expenditures are construction or purchase cost of office property, machines, etc. while employee salaries, cost of supplies, etc. are considered as revenue expenditures.
2. With the Help of a Single Example, Show Capital Expenditure vs. Revenue Expenditure.
If a company purchases a storage facility, the purchase cost is an example of capital expenditure while the cost of painting, refurbishing and other decorations are examples of revenue expenditures.