Capital expenditures are expenditures incurred to acquire the capital of the Company. It is majorly acquired for the development of a business. These expenses enhance the profitability of a business. Examples of capital expenditure are expenses incurred on the purchase of Land, Building, machinery, furniture, etc., expenses incurred on improvement capital assets, or expenses incurred on the installation or erection of machinery in a factory.
Revenue expenditures are the expenses incurred on the day-to-day operation and management of the Company. These expenses are incurred to establish the earning capacity of an organization. Examples of revenue expenditures are expenses incurred on the purchase of stock in trade, selling and distribution expenses, etc.
The Major Difference Between The Capital And Revenue Expenditures Are As Follows:
- Expenses incurred for acquiring assets to enhance the capacity of an existing asset that results in increasing its lifespan are known as capital expenditure. In contrast, expenses incurred for maintaining the day-to-day activities of a business are called revenue expenditures.
- Capital expenditure relates to the acquisition of the fixed asset, and revenue expenditure relates to acquiring stock-in-trade.
- Capital expenditure is capitalized, while revenue expenditure is transferred to the Trading or Profit and Loss Account. An unexpired portion of the capital expenditure is shown as an asset on the balance sheet. Revenue expenditure is an overdue cost.
- Capital expenses are majorly one-time expenses like the purchase of fixed assets, therefore long-term in nature. In contrast, revenue expenses are expenses for the Company’s day-to-day management, consequently short-term in nature.
- Capital expenditure is non-recurring, whereas revenue expenditure is recurring in nature.
- Capital expenditures appear on the assets side of the balance sheet, while revenue expenditures appear in the Company’s income statement.
- Capital expenditures are not matched against capital receipts, but revenue expenditures are matched against revenue receipts for income determination.
- Capital expenditures can be incurred before the start of business, while revenue expenditures are incurred after the start of business.
Revenue expenditures and capital expenditures are contrasting in nature. The revenue expenditure is an investment of money and is periodically done, it is neither profitable nor harmful for business. On the other hand, capital expenditure is the long-term investment that only helps the business.
It is extremely important to find out the nature of capital or revenue, as both have their advantages and shortcomings that are not understandable separately.