Capital and Revenue Expenditure

Expenditure

Expenditure means spending on something. This can be a payment is cash or can also be the
exchange of some valuable item in exchange for goods or services. It is the process of causing a
liability by a commodity. Receipts and invoices keep the records of expenditures. An expense is a
word very similar to expenditure but expense shows the deduction in the value of the asset while
expenditure simply denotes the obtaining of assets. Two types of expenditures are present on the
basis of time durations, that is
1. Capital expenditures
2. Revenue expenditures

Capital Expenditures

The amount spent by the company for possessing any long-term capital asset or to enhance the
working capacity of any existing capital asset, or to increase its lifespan to generate future cash
flows or to decrease the cost of production, is known as Capital expenditure. As a huge amount is
spent on it, the expenditure is capitalized, i.e. the amount of expenditure is spread over the
remaining useful life of the asset.
These are expenditures for high-value items that holds longer duration requirements. Capital
expenditures are long-term expenditures. In other words, when the expenses are made for a
particular asset but they do not get completely consumed in the specific time. Due to this the
earning capacity increases, and in the meanwhile, the price of the assets decreases.
Consequently, the future costs are reduced because the costs of the assets are continuously revised
according to the depreciation taking place. There is a requirement to redo the capital expenditures
in the accounting year. These do not get exhausted in the accounting year and benefits the user in
the future years. Besides that, capital expenditures enhance the position of the business and trade.
There different types of capital expenditure, for example
 Cash money spent on business purposes.
 Purchasing of Plants and machinery items
 IT items
 Electric power equipment
 Permanent additions to existing fixed assets
In a nutshell, the expenditure which is done for initiate current, as well as the future economic
benefit, is capital expenditure. It is a long-term investment done by the entity, in the name of
assets, to create financial gain for the years to come. For example – Purchase of Machinery or
installation of equipment to the machinery which will improve its productivity capacity or life
years.

Revenue Expenditures
In contrast to the capital expenditure, revenue expenditures are not the high-value items, instead,
they are the routine expenditures that takes place in the normal business. In other words, this kind
of expenditure maintains fixed assets.
The expenditure which is incurred on a regular basis for conducting the operational activities of
the business are known as Revenue expenditure like the purchase of stock, carriage, freight, etc..
As per the accrual accounting assumption, the recognition of revenues is done when they are
earned while expenditure is recognized when they are incurred. Therefore, the revenue
expenditure is charged to the Income Statement as and when they occur. This satisfies the
fundamental principle of Accounting i.e. Matching Principle in which the expenses are recorded
in the period of their incurrence.
The benefit generated by the revenue expenditure is for the current accounting year. The examples
of revenue expenditure are as under – Wages & Salary, Printing & Stationery, Electricity
Expenses, Repairs and Maintenance Expenses, Inventory, Postage, Insurance, taxes, etc.
Unlike capital expenditure, earnings do not increase but stay maintained in revenue expenditure.
The assets get consumed in an accounting year and no future benefits are available. Also, the
prices of assets remain fixed. The assets are consumed in less than a year so there is a need to
purchase them again. This is a recurring type of expenditure. There are two sub-categories of
revenue expenditures:
 Direct Expenses: These include the cost of manufacturing of raw material to turn it into
a finished product. For instance, Productive wages and salaries to workers, shipping costs,
legal expenses, electricity, and water bills, fuels costs, rent, commissions, packaging
charges.
 Indirect Expenses: These connect with only selling and distributing goods other than
manufacturing. For example, salaries, depreciation, machinery, items of furniture and
fixing, etc.
Revenue expenditures and capital expenditures are both completely different things as a one.
Revenue expenditure is a periodic investment of money that does not benefit the business nor
leads to any loss in any way. While on the other hand, capital expenditure is the long-term
investment that only benefits the business.

Differences Between Capital and Revenue Expenditure

1. Capital expenditure generates future economic benefits, but the Revenue expenditure
generates benefit for the current year only.
2. The major difference between the two is that the Capital expenditure is a one-time
investment of money. On the contrary, revenue expenditure occurs frequently.
3. Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income
Statement (depreciation), but Revenue Expenditure is shown only in the Income
Statement.
4. Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is not
capitalized.
5. Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure is a
short term expenditure.
6. Capital Expenditure attempts to improve the earning capacity of the entity. On the
contrary, revenue expenditure aims at maintaining the earning capacity of the company.
7. Capital expenditure is not matched with the capital receipts. Unlike revenue
expenditure, which is matched with the revenue receipts.

Conclusion
Capital Expenditure and Revenue Expenditure both are important for business for
earning a profit in the present as well as in subsequent years. Both have its own merits
and demerits. In the case of a capital expenditure an asset has been purchased by the
company which generates revenue for upcoming years. On the other hand, no asset is
acquired as such in the case of a Revenue Expenditure.