Difference between Revenue Expenditure and Capital Expenditure

The estimated money expenditure of the government during a fiscal year is known as Budget Expenditure. The two different kinds of budget expenditure are Revenue Expenditure and Capital Expenditure.

What is Revenue Expenditure?

Revenue Expenditure refers to the estimated expenditure of the government in a fiscal year that does not affect the assets and liabilities status of the government. These expenses are incurred to ensure that government departments run efficiently and cover their ongoing costs, e.g. interest payments, pensions, salaries, subsidies, grants, etc. 

What is Capital Expenditure?

The estimated expenditure of the government in a fiscal year which affects the assets and liabilities status of the government is known as Capital Expenditure. It comprises expenditures, such as the acquisition of land, building, machinery, and other equipment; construction of dams and steel plants; investment in shares, loans, and advances by the Central Government to state and union territory governments; public sector undertakings and other entities.

Difference between Revenue Expenditure and Capital Expenditure

Basis	Revenue Expenditure	Capital Expenditure
Meaning	The estimated expenditure of the government in a fiscal year that does not affect the assets and liabilities status of the government.	The estimated expenditure of the government in a fiscal year which affects the assets and liabilities status of the government.
Appears in	Revenue Expenditure appears in Trading and Profit & Loss Account.	Capital Expenditure appears in Balance Sheet.
Nature	Revenue Expenditure is recurring in nature.	Capital Expenditure is non-recurring in nature.
Purpose	Revenue Expenditure is made for the normal running of government departments and the provision of various services.	Capital Expenditure is made mainly for the acquisition of assets and for granting loans and advances.
Tends to	Revenue Expenditure tends to maintain the earning capacity.	Capital Expenditure tends to increase the earning capacity.
Benefits	Revenue Expenditure provides benefits for an accounting year.	Capital Expenditure provides benefits for several years.
Example	Pension, Salary, Interest, etc.	Expenditure on acquisition of capital asset, Repayment of Borrowings, etc.

How to classify an expenditure as Revenue Expenditure or Capital Expenditure?

• If an expenditure either creates an asset or reduces a liability, it is a Capital Expenditure.
• If an expenditure neither creates any asset nor reduces any liability, it is a Revenue Expenditure.

Example:

Classify the following expenditures as Revenue Expenditure and Capital Expenditure.

1. Repayment of loans.

2. Expenditure on scholarships.

3. Expenditure on collection of taxes.

4. Salary paid to Navy officers.

5. Purchase of Metro coaches from Japan.

6. Amount borrowed from Russia repaid.

7. Expenditure on purchasing tables.

8. Grants given to the State Government.

9. 20% shares purchased by the Government in a Private Ltd.

10. Subsidies.

Answer:

1. It is a Capital Expenditure as it reduces the liability of the government.

2. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.

3. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.

4. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.

5. It is a Capital Expenditure as it increases asset of the government.

6. It is a Capital Expenditure as it reduces the liability of the government.

7. It is a Capital Expenditure as it increases asset of the government.

8. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.

9. It is a Capital Expenditure as it increases asset of the government.

10. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.