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.
These are high-value expenditures that have longer requirements duration, thus they are termed as long-term expenditures. Due to this, there is an increase in earning capacity and a decrease in the price of the assets.
As the costs of the assets are continuously revised according to the depreciation, the future costs are reduced. The capital expenditures enhance the position of the business and trade.
The following are some of the examples of different capital expenditure
Money spent as cash for business purposes.
Purchase of Plants and machinery items
Electric power equipment
Permanent add ons to existing fixed assets
What is Capital Expenditure?
Capital Expenditure, also referred to as CapEx, is 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.
Expenditure is defined as spending on something that can be in the format of paying in cash or exchange for some valuable item for goods or services. It causes liability by a commodity. The records of expenditure are kept as receipts and invoices. An expense is very similar to expenditure but the difference is that expense shows the value deducted from the asset whereas the expenditure is simply the obtaining of assets. There are generally two types of expenditures present on the basis of time durations, they are
It is totally different from capital expenditure, they are not high-value items, but they are the routine expenditures in the normal business which maintains fixed assets.
Unlike capital expenditure, it does not increase the revenue but stays maintained. The assets are consumed in an accounting year and there are no future benefits. The asset prices are stable or fixed. The assets are consumed within a year and hence purchase should be made again. This is a recurring expenditure. It is classified into two sub-categories, they are
Direct Expenses: They consist of the cost of manufacturing raw material to convert into a finished product.
Indirect Expenses: They are connected to only selling and distribution of goods other than manufacturing.
Difference between Capital Expenditure and Revenue Expenditure
Need for Classification
Revenue expenditures and capital expenditures are two totally different things. Where the revenue expenditure is an investment of money that is periodically done. It does not benefit either the business or lead to any loss in any way. Whereas on the other hand, capital expenditure is the long-term investment that only benefits the business.
It is very essential to find out the capital nature or revenue nature as both of them have their own advantages and shortcomings that are not understandable separately.