The occurrence of expenses during the course of business very natural. Generally, expenses are incurred to increase business efficiency and further returns. These are classified into two categories, namely capital expenditure and revenue. Capital expenditure are expenses made to acquire an activity or improve the capacity of the activity. In reverse, spending on revenue it involves routine spending, which is incurred in daily business activities.
The most important difference between capital expenditure and revenue expenditure is that the former aims to improve the overall earning capacity of the concern, while the latter seeks to maintain earning capacity. Take a look at the article, where we worked out some difference points.
|Sense||The expenses incurred to acquire a fixed capital or to improve the capacity of an existing one, with consequent extension in its years of life.||Expenses incurred to regulate the daily activities of the activity.|
|Term||Long term||Short term|
|displayed||Income statement and balance sheet||Income statement|
|Benefit||Over a year||Only in the current accounting year|
|Earning capacity||Try to improve your earning capacity||Maintain the earning capacity|
|Correspondence concept||Not combined with capital receipts||Corresponds to revenue|
Definition of capital expenditure
The amount spent by the company to own long-term fixed assets or to improve the working capacity of any existing capital, or to increase its lifespan to generate future cash flows or to reduce the cost of production, known as expenses in capital account. Since a large amount of money is spent, the expense is capitalized, that is, the amount of the expenses is distributed over the remaining useful life of the asset.
In a nutshell, the expenses that are made to start the current, as well as the future economic benefit, are the capital expenditures. a long-term investment made by the entity, in the name of the business, to create financial gain for the years to come. For example: purchase of machinery or installation of equipment on machines that will improve production capacity or years of life.
Definition of revenue expenditure
Expenses incurred on a regular basis for carrying out the company's operating activities are known as entry expenses such as the purchase of shares, transportation, freight, etc. As with the accrual based accounting, revenues are recognized when they are earned while expenses are recognized when they are incurred. Therefore, revenue expenses are charged to the income statement as they occur. We are satisfied with the fundamental principle of accounting, namely the principle of correspondence in which expenses are recorded in the period of their occurrence.
The benefit generated by expenses relating to revenue for the current year. The examples of revenue expenditure are as below – Wages and salaries, Printing and stationery, Electricity costs, Repair and maintenance costs, Inventory, Postage costs, Insurance, taxes, etc.
Key differences between capital expenditure and revenue
- Investments generate future economic benefits, but Revenue spending generates benefits only for the current year.
- The main difference between the two is that capital expenditure is a one-time money investment. In contrast, revenue expenses occur frequently.
- Investments are indicated in the balance sheet, on the active side, and in the income statement (amortization), but the revenue expenses are indicated only in the income statement.
- Capital expenditures are capitalized as opposed to revenue expenditure, which is not capitalized.
- Capital expenditures are long-term expenses. Conversely, the expense of revenue is a short-term expense.
- Capital Expenditure attempts to improve the entity's earning capacity. On the contrary, management costs aim to maintain the company's earning capacity.
- Capital expenditure does not correspond to capital income. Unlike the revenue expenditure, which combined with the revenue.
If a company deals with computers and opens a new branch in another place for which it buys a building. The acquisition of the building will be a capital expenditure, while the purchase of computers will be an income expense. Let's look at another way. If a company involved in real estate activities, the purchase of buildings will be an income expense while the purchase of machinery would be a capital expenditure.
Note: here it is necessary to concentrate on the intention of the expenses.
Capital expenditures and entry expenses are both important for businesses to make a profit in the present and subsequent years. Both have their merits and demerits. In the case of capital expenditure, a resource was purchased from the company that generates revenue for the next few years. On the other hand, no activity acquired as such in the case of a revenue expense.