Revenue Expenditure v/s Capital Expenditure
Operating a business includes a variety of business expenses. It won’t be wrong if I say a business cannot do without incurring expenses. Generally a business concern incurs expenses in order to generate revenues by undertaking varied operations and activities. Usually, expenditure is incurred to increase the efficiency of business and further returns.
Expenses are broadly classified into two categories namely Revenue Expenditure v/s Capital Expenditure.
Revenue Expenditure is the expenditure which is incurred on a regular basis for conducting the operational activities of the business. In short Revenue expenditure is the amount that is expensed immediately and therefore these are also termed as recurring expenses. Examples for Revenue expenses include Salaries, Rent, Printing & Stationery, Electricity, Repairs and Maintenance Expenses, Inventory, Postage, Insurance, taxes, etc.As per Accrual Basis of accounting, the Revenue is recognized only when they are earned while expenditure is recognized when they are incurred. Therefore, the Revenue expenditure is charged to the Income Statement as and when they occur. By doing so the expenses of one period are matched with the related Revenues for that particular period thus fulfilling the matching principle of Accounting.In the case of Revenue Expenditure the benefit generated is only for the current accounting year.
Capital Expenditure is the amount spent by the company for possessing any long-term Capital asset or to increase the Revenue generating capacity of the asset. The Capital expenditure involves a huge outflow of cash and hence the expenditure is Capitalised. The amount of Capital expenditure is always spread over the remaining useful life of the asset. In other words Capital expenditure is the amount spent to purchase or improve a long-term asset such as equipment or buildings. It involves long term investment by the company. Capital expenditure includes purchase of Machinery, purchase of land, installation of equipment to the machinery which will improve its productivity capacity or life years etc.
Let us see how Revenue Expenditure v/s Capital Expenditure differ from each other:
- The purpose of Capital expenditure is generally to expand and enhance the company’s ability to generate Revenues, whereas Revenue expenditures are mostly incurred for the purpose of maintaining a company’s ability to operate.
- The benefit of Capital expenditure extends to more than one year, but the benefit of Revenue expenditure extends only to the current year.
- Capital expenditure always appears as an Asset in the Balance Sheet whileRevenue expenditure is shown as an expense in the Trading Account or Profit& Loss Account.
- Capital expenditure is non-recurring in nature because it is not incurred on regular basis but Revenue expenditure is recurring in nature as it is incurred on day to day operations.
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