WHAT IS CAPITAL EXPENDITURE ?
Capital expenditures are long-term expenditures. It is an amount spent to acquire or significantly improve the capacity or capabilities of a long-term asset such as equipment or buildings which may include the following :
- Purchase costs (less any discount received)
- Delivery costs
- Legal charges
- Installation costs
- Up gradation costs
- Replacement costs
Such expenditure yields benefit over a long period of time and hence it is written in Assets.
The main purpose of incurring capital expenditure is to increase the earning capacity of the business as well as the fixed assets in an entity. For example – expenditure incurred for the purchase of property & equipment etc.
WHAT IS REVENUE EXPENDITURE ?
Revenue expenditure is the sum of the expense that the business incurs in the production of goods and services, which helps for revenue generation of the company in an accounting period.
This is a recurring type of expenditure & does not result in an increase in the earning capacity of the business but only helps in maintaining the existing earning capacity. For example – Purchase of stock, carriage, freight,etc.
This expenditure does not form the part of the fixed asset cost therefore, it is shown in the statement of income of the year in which it is incurred.
DIFFERENCE BETWEEN CAPITAL EXPENDITURE & REVENUE EXPENDITURE
- PURPOSE – Capital expenditure is incurred to acquire, expand or maintain the capital/ fixed assets of the firm. Whereas revenue expenditure is incurred to maintain the earning capacity of the firm.
- DURATION – Capital expenditures are mainly incurred for a long term period while revenue expenditures are incurred for short term.
- OCCURRENCE – Capital expenditures are non – recurring in nature whereas revenue expenditures are recurring in nature.
- DEPRECIATION – Depreciation is charged on capital expenditure every year while no depreciation is required to be charged on revenue expenditures.
- ADDITION OF VALUE – Capital expenditures add value to the existing assets whereas Revenue expenditures do not result in any value addition.
- ACCOUNTING TREATMENT – Capital expenditures appears in the Cash flow statement of the company and is shown under the head “fixed assets” in the Balance sheet. Whereas Revenue expenditure only appears in the Income statement & not reported in the balance sheet.
Hence, in short capital expenditure is the long-term investment that only benefits the business while revenue expenditure is a periodic investment of money that does not benefit the business nor leads to any loss in any way.
It is important to classify the various expenditures into revenue and capital since both have their own advantages & shortcomings.