Capital expenditure and revenue expenditure are two categories of expenses incurred by businesses. Here are five key differences between them:
Nature of Expense:
Capital Expenditure: Capital expenditure refers to expenses incurred for acquiring, upgrading, or maintaining long-term assets. These assets are expected to provide benefits to the business for an extended period, typically beyond one fiscal year. Examples include the purchase of machinery, land, buildings, or significant improvements to existing assets.
Revenue Expenditure: Revenue expenditure covers day-to-day operational expenses necessary for running the business and maintaining its current level of operation. These expenses are typically short-term and are incurred to generate revenue in the current accounting period. Examples include rent, wages, utility bills, and repairs.
Duration of Benefit:
Capital Expenditure: Capital expenditures provide benefits over an extended period, often several years. The assets acquired or improved contribute to the company’s operations for the long term.
Revenue Expenditure: Revenue expenditures provide benefits only for the current accounting period. They are incurred to maintain the ongoing operations of the business and do not result in the acquisition of long-term assets.
Recognition in Financial Statements:
Capital Expenditure: Capital expenditures are capitalized, meaning they are recorded as assets on the balance sheet. The cost is spread over the useful life of the asset through depreciation.
Revenue Expenditure: Revenue expenditures are expensed in the period in which they are incurred. They are recorded on the income statement as expenses, directly impacting the company’s net income for that period.
Impact on Profit:
Capital Expenditure: Capital expenditures do not immediately impact the profit of the business. Instead, they affect the profit gradually over time through depreciation.
Revenue Expenditure: Revenue expenditures directly reduce the profit of the business in the period in which they are incurred.
Examples:
Capital Expenditure: Buying a new building, purchasing machinery, upgrading computer systems, or acquiring a long-term intangible asset like a patent.
Revenue Expenditure: Rent payments, utility bills, employee salaries, repairs and maintenance, and costs associated with day-to-day business operations.
Understanding the distinction between capital and revenue expenditures is crucial for financial management and reporting, as it affects how expenses are accounted for and how they impact the financial statements of a business.