The major difference between capital expenditure and revenue expenditure is that the former is for acquiring and managing fixed assets, while the latter is for managing business operations.
What is Capital Expenditure?
Capital Expenditure is the company’s fund on fixed assets that provide a long-term gain to the business. The returns usually last for more than a year. Companies invest in this way in order to expand their business or to increase their chances of making money.
The variety of present production or manufacturing activity is primarily due to previous capital investments. The company’s future operations will be significantly impacted by the current capital expenditure decisions.
Establishing a new factory, and investing in equipment or intangible assets like a licence or a patent are examples of capital expenditure. The cash flow statement includes the expenditure amounts for a certain accounting period.
What is Revenue Expenditure?
Revenue Expenditure is the money business spends for the efficient functioning of the organisation. The returns usually last for less than a year.
Revenue expenditure does not contribute to the ability to generate profits. Instead, it contributes to maintaining operational activities and helps manage the assets of the company. Salaries, rent, electricity costs and transportation charges are a few examples of Revenue Expenditure.
The Revenue Expenditure is not mentioned on the Balance Sheet. It is mentioned on the income statement.
Difference Between Capital and Revenue Expenditure
Capital expenditure is funds used to acquire and upgrade fixed assets of the company. Whereas, revenue expenditure is funds required to manage the daily operations and management of the company.
Duration of Return
Capital expenditure is the investment in fixed assets like land, property and machinery. So, the returns would ideally last for a longer time, typically more than a year. Revenue expenditure is the money invested in the operational and managing part of the business. Thus, the return duration is quite short-lived, usually for less than a year.
Capital expenditure is part of a company’s cash flow statement. It also reflects under fixed assets in the balance sheet. The revenue expenditure is not part of the balance sheet. It falls under the income statement of the company.
Capital expenditure involves big and long-term decisions. Thus, they’re not frequent. Whereas revenue expenditure is a part of daily operational and management activities. So, it is recurrent expenditure. For example, paying salaries, electricity bills and transportation costs.
Capital expenditure involves the purchase of fixed assets like property and big machinery. Thus, it has a strong resale value. Revenue expenditure, on the other hand, is used to manage the daily functioning of the company. Therefore, it is clear that reselling is absurd.
Capital expenditure directly impacts the earning potential of a company. An example is investing in machinery to increase efficiency and quality. Whereas, revenue expenditure has an impact on the profitability of the business. It includes rent, freight charges, commission, etc. A change in these expenditures will affect the profitability of the company.
Since capital expenditure involves the purchase of fixed assets, the depreciation of an asset is charged here. Whereas in revenue expenditure, such a purchase does not exist; thus, the depreciation is irrelevant.
Let’s consider a company that owns a 5-floor building. The building requires renovation, which is a maintenance and management expense. This will count as revenue expenditure. But, if the company decides to add an extra floor to the building, it will, in turn, affect the company’s earning potential. This is an example of capital expenditure.
Explore: What is Free Cash Flow?
Capital Expenditure vs Revenue Expenditure: Key Differences
To sum up, here is the difference in essence
|Parameter||Capital Expenditure||Revenue Expenditure|
|Definition||Money spent on fixed assets||Money spent on management and operations|
|Duration of return||More than one year||Less than one year|
|Gains||Long term gain||Short term gain|
|Mention in accounting books||Cash flow statement||Income statement|
|Resale Value||Have a resale value||Little to no resale value|
|Motive||Impacts earning potential of the company||Impacts profitability of the business|
|Depreciation Handling||Depreciation is charged||No depreciation|
|Example||Adding an extra floor to the building||Maintenance of building|
Explore: What is Fund Flow Statement?
Frequently Asked Questions
There are two distinct groups of capital expenditures
Capital Expenditure on Tangible Assets
Typically, these are physical, immovable, and non-consumable assets with a useful life of more than one accounting period. For example
1. Investment in a piece of land, a building, or both, as well as maintenance, renovation, and debt repayment.
2. Costs associated with purchasing, setting and maintaining computers, laptops, and related equipment.
3. Purchase of manufacturing facilities, machinery, and equipment.
Intangible Capital Expenditure
It takes more than one fiscal year to gain the value of the cost incurred on these assets. For example
1. Software upgrades and purchases.
2. Obtaining patents and copyright protection for inventions, goods, and services.
3. Fees for registering a licence.
Revenue expenditure can broadly be classified into two types
Costs that are incurred directly during the production of goods and services are known as direct expenses. Direct expenses also include the expenses that are incurred during regular business operations. These comprise the expenses incurred for turning raw materials into finished items or products such as electricity cost for machinery, cost of labour, rent and legal expenses.
These costs are typically incurred during the sale and distribution of the final goods and services. These expenses support the proper operation of the asset, which in turn supports the proper operation of the business, even though they are not directly related to the final goods. Taxes, employee wages, depreciation, and interest are a few examples. Repair and maintenance expenditures are also classified as indirect expenses.
Explore: Golden Rules of Accounting