- Capital expenditure and revenue expenditure are two types of expenditures incurred by businesses.
- It is important to distinguish between the two types of expenditures, as they are recorded and treated differently in financial statements.
Capital Expenditure:
- Capital expenditure refers to the expenditure incurred on acquiring or improving non-current assets that will be used in the business for more than one accounting period.
- Examples of capital expenditure include the purchase of property, plant, and equipment, investment in research and development, and acquisition of intangible assets.
- Capital expenditure is recorded as an asset on the balance sheet and is depreciated over its useful life.
- Capital expenditure requires a large outlay of funds and has a long-term impact on the business.
- Capital expenditure is made with the aim of generating future economic benefits for the business.
- Capital expenditure is usually funded by long-term sources of finance, such as equity or loans.
- Capital expenditure is subject to capital allowances, which are tax deductions for businesses that invest in certain types of assets.
- Capital expenditure decisions are made by the senior management and are based on long-term strategic considerations.
Revenue Expenditure:
- Revenue expenditure refers to the expenditure incurred on the day-to-day running of the business, such as wages, rent, and utility bills.
- Examples of revenue expenditure include the purchase of raw materials, salaries and wages, and advertising costs.
- Revenue expenditure is recorded as an expense on the income statement and is fully deducted from revenue in the period it is incurred.
- Revenue expenditure is usually funded by short-term sources of finance, such as bank overdrafts or trade credit.
- Revenue expenditure is made with the aim of maintaining the business’s current level of operations.
- Revenue expenditure has a short-term impact on the business and does not increase the earning capacity of the business.
- Revenue expenditure is not subject to capital allowances.
- Revenue expenditure decisions are made by the lower-level management and are based on day-to-day operational considerations.
Differences between Capital and Revenue Expenditure:
- Capital expenditure is incurred on non-current assets, while revenue expenditure is incurred on current assets.
- Capital expenditure has a long-term impact on the business, while revenue expenditure has a short-term impact on the business.
- Capital expenditure is recorded as an asset on the balance sheet, while revenue expenditure is recorded as an expense on the income statement.
- Capital expenditure is depreciated over its useful life, while revenue expenditure is fully deducted from revenue in the period it is incurred.
- Capital expenditure requires a large outlay of funds, while revenue expenditure is typically smaller in scale.
- Capital expenditure is funded by long-term sources of finance, while revenue expenditure is typically funded by short-term sources of finance.
- Capital expenditure decisions are made by senior management based on long-term strategic considerations, while revenue expenditure decisions are made by lower-level management based on day-to-day operational considerations.
- Capital expenditure is subject to capital allowances, while revenue expenditure is not.
- Capital expenditure aims to generate future economic benefits for the business, while revenue expenditure aims to maintain the business’s current level of operations.
- Capital expenditure is less frequent than revenue expenditure.
