The income or investment spends on such buying falls under capital expenditure. The difference between capital and revenue is very important to understand. When people think of capital, they tend to think of assets such as money or property.

• The purchases or cash outflows for capital expenditures are shown in the investing section of the cash flow statement (CFS).
• They are not capitalised and involve maintenance of equipment and machinery, rent, salary/ wages, and others.
• If Company B has to spend $400 per month on raw materials for its production line, then that $400 counts as a revenue expenditure for that month as it documents cost of the asset.

An outlay of funds for acquiring or improving a fixed asset that the company will use to earn revenue over the years is a 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. The benefits of revenue expenditure are enjoyed for a short time (less than 12 months). To help you understand capital and revenue expenditure, here are a few points that distinguish the two expenses. Revenue expenditures expense in the current period, or shortly thereafter, and are consumed within a very short time. After this, they will bear no further effect on your expenses, unless they recur, in which case each separate recurrence is expensed separately.

Investors often look at capital expenditure as a good sign, but investors must also be skeptical because business profits may not increase. Instead, they must recover the cost through year-by-year depreciation over the useful life of the asset. Companies often use debt financing or equity financing to cover the substantial costs involved in acquiring major assets for expanding their business.

Basic Conditions for Capital Receipts

These assets over a long period of time will generate revenue for the business. These are funds invested by businesses to upgrade, acquire, and maintain the fixed assets of the company. Capital expenditure is money is being spent on assets that will increase the company’s ability to pull in profit or operate at a comprehensive income definition higher performance level. New software, vehicles, machinery and tools that will be used for at least 12 months are considered capital expenditure. Capital expenditure, unlike revenue, is looked at more as an investment than a cost, because it is being used to strengthen the company so it can do better business.

For instance, a company can purchase machinery or install new machinery equipment to improve productivity capacity and eventually increase profits. Generally, capital expenditures focus on more long-term investments made by the company. It refers to funds the company spent to acquire, improve, or maintain physical or intangible assets. Typically, this monetary investment improves capacity or efficiency when generating more revenue. Deferred revenue expenditure is a kind of expenditure that is revenue in nature but its benefits last for a number of accounting periods. Examples of deferred revenue expenses are the discount on issue of shares, research and development expenses, heavy advertising expenses for the promotion of a new product, etc.

Distinction Between Capital and Revenue Expenditure

Both help the business earn profits in present in and in following years. With a capital expenditure, a company purchases an asset, which helps, generates profits for the future. Conversely, no asset is attained with revenue expenditure, but it helps maintain daily business processes. First, capital expenditure involves long-term investments that end up on the balance sheet.

• That’s a hole developing in your pocket all of a sudden—it’s a revenue expenditure.
• Your capital receipts will reflect this, for instance, if your company is expanding quickly and has to borrow money through a bank loan or an initial public offering (IPO).
• A revenue expenditure is assumed to be consumed within a very short period of time.
• Tracking revenue expenditure gives companies a better view of expenses that pay for themselves in the long run.
• Expenditure incurred for repayment of the debt financing depreciates, as does the cost of the asset acquired.

They are non-recurring, meaning they do not occur regularly and cannot be used for profit distribution. Unlike revenue receipts, which can be used to fund reserves, capital receipts are not utilised to fund reserves. They end up increasing a company’s obligations or decreasing its assets. All in all, the expenditure to increase current, and future economic benefits, is capital expenditure.

Other Expenses

Revenue expenditure is recurring in nature which means you need to spend on a periodic basis to derive any benefits from it. The company is not benefited from revenue expenditures beyond the current accounting period. For maintaining the existing productivity, a company has to incur revenue expenditures. For example, the electricity bill paid for the current year cannot be benefited from in the next year.

The difference between Capital Receipts and Revenue Receipts is that Capital receipts are the income generated from a business’s financing and investment activities. In contrast, revenue recipes are the income generated from the operating activities of a business. There are certain expenditures which are revenue nature but the benefit of which is likely to be derived over a number of years. Examples of capital expenditure include purchasing or improving the property, buying new equipment or technology, and investing in research and development.

The Formula of Capital Expenditure

Revenue Expenditure is an expense that is incurred in the current accounting year and the benefits of that expense are also enjoyed during the same time period. Therefore, revenue expenditure is applicable only for the current accounting period. Revenue expenditures are listed as expenses on the debit side of the profit and loss account. The costs a business incurs while operating are referred to as revenue expenditures or operating expenses (OPEX). It can be characterized as the total costs incurred by businesses during the course of their production activities. In most cases, these expenses do not lead to the creation of assets, and the advantages of OPEX are only valid for one accounting year.

Due to their recurrence, such expenses might also qualify for tax deductions during a specific accounting period. It should also be known that OPEX costs are not capitalized and do not affect by depreciation. A company generally uses capital expenditures for long-term investments. For example, it may buy land to expand its business to new areas, and buildings to improve manufacturing and warehouse including technology to grow its business.

Similarly if we do some expenditure and that can increase the capacity or capability of any vehicle then that expense would be considered as Capital expenditure. We hope this article has been of help in providing information about  the difference between capital expenditure and revenue expenditure. Here at Khatabook, we provide precise and accurate information to our readers.

Sometimes the answer is quite obvious, while the line between the two is blurred in some cases. Classifying the expenses properly will save you a lot of trouble during tax time, while showing a strong financial statement. Now, if you add a few more units to the storage area, it would be considered CapEx as it provides additional value to the asset. Revenue Receipts are the income generated from the operating activities of the business. Revenue expenditures are deducted from an organisation’s income to calculate the total compensation. Income costs are entirely deductible in the year in which they happen.

Comparison chart: capital expenditure vs. revenue expenditure

These are matched with the revenue Receipts to know the profit/ loss for the year. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Revenue can be generated in different ways, for example, through sales, advertising, subscriptions, donations or other sources. Further, they appear on the debit side of the Trading and Profit and Loss Account.