Difference Between Revenue Expenditure and Capital Expenditure

Edited by Diffzy | Updated on: September 22, 2022

       

Difference Between Revenue Expenditure and Capital Expenditure Difference Between Revenue Expenditure and Capital Expenditure

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Introduction

Budgetary decisions and relevant documentation is vital for the business’s resource management. Most companies calculate the monthly or annual expenses incurred by the company through proper documentation. These analyses help us understand whether the company reaps profits or needs depreciation. Expenses made by a business can be broadly classified into two categories: Revenue expenditure and Capital expenditure

Revenue Expenditure vs. Capital Expenditure

The main difference between revenue expenditure and capital expenditure lies in the duration of the expenditure and their respective purposes. Revenue expenditures can be described as ongoing expenses that are usually spent for day-to-day operations whereas capital expenditures can be described as investments that help gain new assets or enhance the already existing assets in the organization. Revenue expenditures are short-term expenses whereas capital expenditures are long-term investments.

Difference Between Revenue Expenditure and Capital Expenditure in Tabular Form

Table: Revenue Expenditure vs. Capital Expenditure
Parameters of Comparison
Revenue Expenditure
Capital Expenditure
Definition
These are the expenses made to run day-to-day operations and activities in a business.
These are the expenses made as an investment to acquire new assets in a company or to enhance the existing assets to increase their value.
Tenure
These are short-term expenditures.
These are long-term expenditures.
Physicality
Revenue expenditures do not have a physical presence.
Capital expenditures can be both tangible and intangible, due to the assets that don’t have any physical presence.
Occurrence
Revenue expenditures can be recurring in nature as they are required to maintain daily operations.
Capital expenditures are typically non-recurring as they are a one-time acquisition that isn’t generated every day.
Account
This type of expenditure is classified as an expense account.
This type of expenditure is classified into an asset account.
Assets
Revenue expenditures do not typically enhance the values of existing assets.
Capital expenditures can enhance the value of existing assets and buy new ones too.
Revenue
These types of expenditures reduce the business revenue and thus have an impact.
These types of expenditures do not reduce the business revenue and thus, have no impact on the revenue.
Capitalization
Revenue expenditures are those expenses that cannot be capitalized.
Capital expenditures are those expenses that can be capitalized if desired.
Examples
Wages, Rent, Utility expenses, Taxes, etc.
Technology equipment, Furniture, manufacturing equipment purchases.

What is Revenue Expenditure?

A revenue expenditure can be described as all the expenses made to run or complete daily operations or maintain varying assets. These expenditures only reap short-term benefits and pertain to the current period only. They can have an impact on the revenue of the business and thus are recurring. They are not fit for long-term benefits and cannot be capitalized.

Ways to Determine a Revenue Expenditure:-

  • Expenses incurred while acquiring goods to resell them, sometimes through renovation, are categorized as revenue expenditure.
  • Expenses incurred while the purchase of raw material for the manufacture of finished goods, in the case of the manufacturing industry.
  • Expenditures made on anything other than purchasing fixed assets are revenue expenditures.
  • Expenditures made on fixed assets can be counted as revenue expenditures. Eg:- repairs and renewals for furniture.
  • Any kind of depreciation on fixed assets can be categorized as an item of revenue expenditure.
  • Any sort of administrative purchases for the business are categorized as revenue expenditures. Eg:- salaries, hikes, electricity, travel, commissions, rents, etc.
  • Non-operating expenditures that aren’t mentioned above are counted as revenue expenditures. This includes grievances or losses incurred such as thefts, fires, and other such disasters.
  • All expenditures made to protect the business against any kind of threats or defamation are called revenue expenditures.
  • Expenditures made to relieve a liability from its recurring nature are also grouped into revenue expenditures. Eg:- When a person retires, his pension can be counted as an item of revenue expenditure.

Types of Revenue Expenditures:-

Revenue expenditure can be classified into two categories based on how the expenditure is incurred.

  • Direct Expenses: Direct expenses are those that are incurred in the process of production. This means that all costs that are accumulated throughout the manufacturing process of converting raw material into a finished product are classified as day-to-day operations and counted into direct revenue expenditures. A few other examples of direct expenses are electricity consumed during the manufacture, shipping expenses, property rent, legal expenses for documentation and miscellaneous expenses, and wages for labor.
  • Indirect Expenses: The other kind of revenue expenditures are indirect expenditures. Indirect expenses are those incurred through the purchase and distribution of the company’s products and services and not the manufacturing. A few examples of such indirect expenses are salaries for employees that help in sales, directly or indirectly, taxes, repairs, maintenance costs, commission, interest, etc. Indirect expenses aren’t always linked to the finished goods and services but can also be spent for the distribution, maintenance, and functioning of the asset. Thus, they might also include administrative costs.

Revenue expenditure can also be classified as to whether the expenses are made over a certain period or incurred immediately.

  • Ongoing expenses: Pretty much explicable through the name, ongoing expenses are those that are accumulated over a certain period. One example of such an ongoing revenue expenditure is payments related to subscriptions for various items such as software.
  • Immediate expenses: Immediate expenses are those that are incurred and listed in accounting immediately. Once spent, they will be offset against the overall revenue without any delay. A few examples of such immediate expenses are stationary replacement, repairs, expenses of marketing, etc.

Examples of Revenue Expenditures:-

  • Repair expenses for a worn-out device is a revenue expenditure.
  • Severance fees for employees who were fired.
  • Legal expenses to defend the company’s reputation against suits.
  • Painting the walls of the factory or the office.
  • Expenses for advertisements to promote products or the overall business.

What is Capital Expenditure?

Capital expenditures are those expenses that are made to acquire long-term investments that can act as fixed assets. These assets can be both tangible and intangible. They exist to serve the company in the long run but do not have any impact on the revenue of the business. These expenses are typically larger than a revenue expenditure by a huge margin.

Ways to Determine a Capital Expenditure:-

  • Any expenses incurred in the process of acquiring a new asset that will remain fixed are termed a capital expenditure.
  • Expenses made to acquire assets that will serve the business for a long time i.e., more than one year, can be categorized as capital expenditures.
  • If the goods purchased to serve as assets that earn revenue for the business and are not meant for sale, the relevant expenses are categorized as capital expenditure.
  • When there are expenses made to put the new asset into its operating condition, such as the installation after the manufacture or purchase are classified as capital expenditures. Transportation charges of the product to be put into the operating condition are counted as capital expenditures.
  • When an old asset needs extra expense to be put into proper functional condition, all the expenses made are treated as capital expenditure.
  • Any expenses made through the efforts of increasing the earning capacity of the business are categorized as capital expenditure. This includes all the shifting expenses when the new location is more relevant and helps the business.
  • When there is any requirement of borrowing funds for the construction or production of assets, all the relevant expenses incurred are categorized as capital expenditure. These expenses can be interests accumulated, legal costs, etc.

Types of Capital Expenditure:-

Capital expenditure can be categorized based on whether the assets purchased are tangible or intangible

  • Capital expenditure for tangible assets: When expenses are made to purchase fixed assets that are physically present and can be beneficial in the long run, they are tangible capital expenditure assets.
  • Vehicular expenses: Oftentimes, organizations need travel facilities to transport goods and carry out relevant services. This is counted as maintenance of the company’s assets and thus, categorized as capital expenditures.
  • Technological equipment: Materials such as computers, printers, servers, laptops, tablets, and other such peripherals are counted as capital expenditures. All the installation and maintenance costs of the same will be accumulated into the capital expenditure accounting.
  • Proprietary expenses: When new properties are purchased to shift or expand the business, they are grouped into capital expenditures. Purchases made to improve the building’s design such as plants, ACs, fans, blinds, and other decorative needs will be counted as capital expenditures.
  • Upgrades and repairs: When businesses own factories with machinery, heavy or light, they are always prone to wear and tear at some point in time. Thus, there is a constant need for upgrades and repairs. If the cost of upgrading is higher than the capital received, then it must be depreciated. These expenses are counted as capital expenditures.
  • Capital expenditure for intangible assets: the expenses presented upon those assets that do not have a physical form or exist online, virtually are classified as capital expenditure for intangible assets.
  • Software: In the world of digitization, purchasing the right software is considered to be a significant part of business management. The software must be purchased and distributed to give access to everyone in the organization. As time proceeds, the software might have upgrades available that can be necessary for the improvement of the business. All the expenses relevant to these chores will be counted as capital expenditure.
  • Copyrights and patents: The company needs to be legally protected against any kind of claims to maintain its integrity and loyalty to the customers. Thus the appropriate authorities must resolve this situation by demanding the proper patents and purchasing copyrights.
  • Goodwill: These expenses are made when the company or the organization takes over another firm.
  • License: According to the type of business, the license required will change. Research and required efforts must be done to acquire the necessary licenses. The registration charges incurred in this process will be grouped as capital expenditure.

Examples of Capital Expenditures:-

  • Carriage and overhaul expenses of the purchased machinery.
  • Obtaining licenses for the business.
  • Renovation of an old building that belongs to the company.
  • Loans acquired for construction of industries, plants, and factories.
  • Expense required to compensate losses acquired on fixed assets due to unforeseen disasters.

Main Differences Between Revenue Expenditure and Capital Expenditure in Points

  • Revenue expenditures pertain to the expenses made to run daily operations and activities whereas capital expenditures are made to acquire new investments that can serve as fixed assets to the company.
  • Revenue expenditures reap short-term benefits whereas capital expenditures are made to reap long-term benefits.
  • Revenue expenditures typically do not have a physical expenditure whereas capital expenditures do not need to have a physical form. they can be both tangible and intangible.
  • The expenditures that can be recurring are revenue expenditures since there are several day-to-day operations. On the other hand, capital expenditures are not recurring since most of these are long-term investments that do not vary over time.
  • Any kind of revenue expenditure can be classified as an expense account but capital expenditures are classified as asset accounts.
  • Revenue expenditures are those that cannot be capitalized whereas capital expenditures have the potential to be capitalized.
  • Revenue expenditures can have an impact on the business revenue whereas capital expenditures cannot have an impact on the business revenue.
  • Any expenses made to enhance the value of existing assets are revenue expenditures whereas capital expenditure can help in both enhancing and purchasing new assets.
  • A few examples of revenue expenditures can be wages for laborers, rent, expenses of utilities and equipment, taxes that need to be paid punctually, etc. On the other hand, a few examples of capital expenditure are major technology equipment, furniture required for the office, manufacturing equipment required for the business such as machinery in the factories, etc.

Conclusion

From the above discussion, we can infer that revenue expenditures are incurred through daily expenditures and reap short-term benefits for the business whereas capital expenditures are accrued through investments made for fixed assets that reap long-term benefits for the organization.

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"Difference Between Revenue Expenditure and Capital Expenditure." Diffzy.com, 2022. Sun. 25 Sep. 2022. <https://www.diffzy.com/article/difference-between-revenue-expenditure-and-capital-expenditure-274>.



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