Revenue Expenditure V/s Capital Expenditure

Difference between Revenue Expenditure and Capital Expenditure

What is Revenue Expenditure?

Revenue Expenditure is defined as the amount spent or expense incurred, on a consistent basis, towards performing functional activities of the business such as cartage or freight paid, purchasing stock etc. According to the accounting assumption, revenue is documented when it is earned while expenditure is documented when it is incurred. The benefit made through revenue expenditure is accounted for in the present accounting year. For instances, revenue expenditure are – electricity expenses, maintenance and repair expenses, postage, printing & stationery, insurance, inventory, taxes, salary and wages etc. Revenue expenditure made on fixed assets comprises the amount spent for 'maintaining' instead of augmenting the capacity of an asset to maximise wealth. These expenses are incurred on a continued basis and the advantage from these costs is achieved over a comparatively short period of time – for instance, a business plans to purchase a machine for producing bread. Hence, costs include the following:

  1. Cost pertaining to maintenance

  2. Cost for repairs

  3. Renewal expenses

Since, revenue expenditure is not part of fixed asset cost they are accounted for in the income statement and to record a revenue expenditure the accounting entry will be as mentioned below:

Debit entry Type of revenue expenditure
Credit entry Cash/amount payable

Revenue expenditure can be further categorised as below:

  1. Direct Expenses: Direct expenses encompass the manufacturing cost of raw material to covert it into a finished product. For example, commissions, electricity and water bills, fuel cost, paying salaries and wages to workers, legal expenses (copyright, trademark etc.), rent, packaging charges etc.

  2. Indirect Expenses: Indirect expenses such as depreciation, items of furniture and fixing, machinery etc.

The initial procurement and cost of installing a machine will be categorised as capital expenditure, whereas, any following maintenance and repair cost incurred will be treated as revenue expenditure. This is because of the reason that maintenance and repair does not upsurge the earning capability of a machine, however, only maintains it (i.e. it a bread producing machine is repaired it will still produce the similar amount of bread as it did on the first day)

Revenue Expenditure Versus Capital Expenditure

What is Capital Expenditure

The capital expense incurred by an organisation for owning any longstanding capital asset or to augment the working capability of any prevailing capital asset, or to upturn its life cycle to generate additional cash flows or to reduce the production cost, is referred to as Capital expenditure. Since, the cost is huge the expense amount is capitalised, i.e. the amount of expense is spread over the outstanding life of an asset. In other words, an expenditure done for the future economic benefit of a business is usually termed as a capital expenditure. A capital expenditure is a long-term investment made by an organisation, in asset terms, to generate financial wealth in the coming years. For instance, machinery purchased to enhance the production capacity and generate profits in the coming years is known as a Capital Expenditure. The various types of capital expenditure include the following:

  1. Purchase of information technology items

  2. Purchase of plant and machinery

  3. Purchase of electric power tools

  4. Any permanent additions to prevailing set of fixed assets

Capital expenditures signifies main investments made by an organisation to grow its business and earn additional profit. Capital expenses are made on the purchase of long-term assets (equipment, land and building etc.). Since, a Capital expense is made to generate income by an organisation over a period of time, the firm is not permitted to subtract the entire cost of an asset in the year in which the expense was incurred – capital expenses must be recovered year-by-year as depreciation on the life of the asset. Major Corporates or big manufacturing units usually use equity financing or debt financing to cover the large costs involved in buying major assets for growing their business – Capital expenditures could be made on a fixed assets such as new equipment or plant property. Accounting entry for a capital expenditure is as follows:

Debit entry Fixed assets
Credit entry Cash/amount payable

Chart of Comparison: Revenue Expenditure v/s Capital Expenditure

Basis for Assessment Revenue Expenditure Capital Expenditure
Definition or nature of expense Expenses relating to the regular day to day events in a business Expenses relating to procuring a capital asset or enhancing the capacity of an already installed capital asset, thereby, resulting in expanding the life of a capital asset
Benefit timeline The remunerations realised within an accounting year The benefits realised are in excess of one accounting year (multiple years)
Capitalisation Not any Of course
Duration Short-term expense Long-term expense
Earning capacity Maintain earning capacity Aims to enhance earning capacity
Recorded in financial statement It is shown in the income statement It is shown in the balance sheet, as well as income statement
Type of expense Recurrent and regular in nature Non-recurring and one-time expense

Some other Differences between Revenue Expenditure and Capital Expenditure

  1. Revenue expenditure generates benefit for a giving accounting period, whereas, capital expenditure generates upcoming economic benefits

  2. Revenue expenditure is a frequent expense, whereas, capital expenditure is a one-time investment

  3. Revenue expenditure is records in an income statement, whereas, Capital expenditure is records in an income statement (as depreciation) and in the balance sheet (on the asset side)

  4. Revenue expenditure is not capitalised, whereas, a Capital Expenditure is capitalised

  5. Revenue expenditure is short-term in nature, whereas, Capital Expenditure is long-term

  6. Revenue expenditure focuses on maintaining the earning capability of an organisation, whereas, a Capital Expenditure aims to improve the earning capability of an organisation

  7. Revenue expenditure is matched with revenue receipts, whereas, Capital expenditure is not matched with the capital receipts

Examples to understand Revenue Expenditure and Capital Expenditure

Accounting entry Recorded as Type of Expenditure Description
Wages paid on the goods purchased Debit wages account (A/C) Revenue Expenditure Wage paid to provisional workers on purchase of goods is a revenue expenditure since goods are purchased to be sold. The transaction is repetitive by nature as goods are purchased again and again as part of the business operations
Cartage or freight paid on purchase of goods Debit cartage account (A/C) Revenue Expenditure Cartage or freight on purchase of goods is a revenue expenditure since goods are purchased to be sold further – cartage is paid to transport goods from warehouse to customer
Spent £7,000 on purchase of a second-hand car and £2,000 were spent for its repairs and servicing Debit motor car account (A/C) for both expenses Capital Expenditure A vehicle (in this scenario a second-hand car) is a fixed asset since it can be used for a number of years and its utility does not reduce in a year – hence, capital expenditure. Here, cost of service is also a capital expenditure
Spent £4,000 for whitewash of an office building Debit whitewash account (A/C) Revenue Expenditure Painting and maintaining a building is imperative as it enhances the life of a building. Since, the profit earnings of an organisation do not increase, hence it is a revenue expenditure
Purchased a new machinery for £10,000 and £750 was spent on its installation and assembly Debit machinery account (A/C) for all expenses Capital Expenditure Machinery is a long-lasting business asset and can be used for many years. Installation and assembly is mandatory to use a machine. So both the expenses – purchase of machinery and installation and assembly are capital expenditure
Purchase of books worth £500 and £10 was paid for shifting the books to the library Debit books account (A/C) for both expenses Capital Expenditure Books, to enhance business knowledge, can be used for numerous years – hence, capital expenditure. Also, cost paid to transport the books is a capital expenditure
Purchase of land worth £200,000 and £5,000 were paid as legal costs Debit land account (A/C) Capital Expenditure Purchase of land is treated as a fixed asset. Any expense related to the procurement of land is regarded as a part of its purchase price – hence, capital expenditure

Add Your Comments