Capital Expenditures and Revenue Expenditures

 

Capital expenditure is related to fixed assets and long-term liabilities.
Revenue is related short-term and day to day operating activities.

 

CAPITAL EXPENDITURES

When an organization purchases permanent assets or improves their life, it is known capital expenditures.

It is based on long-term.

It helps to increase production volume or decreases cost of production.

It is non-recurring in nature.

Capital expenditures are shown in assets side of balance sheet.

Some capital expenditures are:

a.     Purchase of fixed assets like land and building, plant and machinery, furniture, equipment.

b.    Transport, installation and erection charges of fixed assets.

c.     Legal charges and registration charge for purchasing fixed assets.

d.    Expenses paid to improve extending working capacity of existing asset.

e.     Underwriting commission and brokerage charges to issue shares and debentures etc.

 

REVENUE EXPENDITURES

When an organization incurs expenses for operation activities of the business, it is known revenue expenditures.

It is based on short-term.

It helps to operates administrative work.

It is recurring in nature. 

It may be daily, weekly, monthly or yearly.

Revenue expenditures are shown in debit side trading, profit and loss account.

Some revenue expenditures are:

a.     Purchase of raw materials for manufacturing company.

b.    Purchase of finished goods for resale.

c.     All manufacturing expenses.

d.    All office or administrative expenses.

e.     All selling and distribution expenses.

f.       All financial expenses etc.

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DEFERRED REVENUE EXPENDITURES

Some revenue expenditures are incurred in advance for several years.

These expenditures will provide benefit for the organization.

Some deferred expenditures are:

a.     Pre-operation costs.

b.    Preliminary expenses.

c.     Heavy advertisement.

d.    Cost of developing mines and plantations etc.

Above expenditures are written off during some years.

These expenditures are treated as deferred expenditures.

They are shown is assets side of balance sheet.

Written off amount is deducted from deferred expenditures in balance sheet and debited to profit and loss account.

Differences between Capital and Revenue Expenditures

Bases	Capital expenditures	Revenue expenditures
Nature	It is non-recurring in nature	It is recurring in nature
Purpose	It is incurred to purchase fixed assets or improve their life.	It is incurred to manage day-to-day business activities.
Term	It is for long-term; more than one year.	It is for short-term; less than one year.
Earning	It helps to increase earning capacity of the business.	It helps to maintain earning capacity of the business.
Show	It is shown in assets side of balance sheet.	It is shown in debit side of trading, profit and loss account.

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