In the course of running a business, various expenses are incurred. Some are designed to yield long-term profits, while others are short-term spending.
Businesses incur expenses in order to boost their efficiency and consequently, their returns. Depending on their nature, these expenses can be divided into capital expenditure and revenue expenditure.
Read more about: Types of Expenditure
Capital expenditures are the expenses a business incurs with the aim of generating long-term benefits. They are typically spent on acquiring, improving, or maintaining fixed assets such as buildings, vehicles, or equipment.
These expenditures are recorded on the asset side of the balance sheet. They are often made on assets like property, machinery, furniture, or vehicles that help to increase the business's operational capability.
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Revenue expenditure, on the other hand, is the spending required for the daily operations of a business. This includes salaries, rent, utilities, insurance, office supplies, postage, and taxes.
These expenses do not create assets nor reduce liabilities. They are recurring and crucial for maintaining the daily operations of a business.
Revenue expenditures can be split into two groups:
1. Expenditures for generating business revenue: These expenses are necessary for covering the operational cost of a business, thus they are classified as operating expenses.
2. Expenditures for maintaining revenue-generating assets: These expenses are spent on the upkeep and maintenance of the company's assets to keep them operational without extending their lifespan. Examples include costs for repairs or repainting.
Here's a comparison between capital expenditure and revenue expenditure to give you a clearer understanding of their roles in a business.
|
Capital Expenditure |
Revenue Expenditure |
|
Definition |
|
| Expenses incurred for purchasing or improving long-term assets that extend their useful life | Expenses incurred to cover the daily operations of a business |
|
Duration |
|
| Long-term | Short-term |
|
Value Addition |
|
| Increases the value of an existing asset | Does not increase the value of an existing asset |
|
Physical Presence |
|
| Has a physical presence, except for intangible assets | Does not have a physical presence |
|
Frequency |
|
| One-time in nature | Recurring in nature |
|
Capitalisation |
|
| Yes | No |
|
Impact on Revenue |
|
| Does not reduce business revenue | Reduces business revenue |
|
Benefits |
|
| Provides long-term benefits to the business | Provides short-term benefits to the business |
|
Appearance on Financial Statements |
|
| Appears as assets on the balance sheet and partially on the income statement | Always appears on the income statement |
This comprehensive guide on the differences between Capital Expenditure and Revenue Expenditure should be helpful for Commerce students. For more insightful articles, stay tuned.
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