The amount of depreciation is a revenue expenditure and is debited to profit and loss account. For example, Construction of Metro is a capital expenditure as it leads to creation of an asset. S.No Capital Expenditure Revenue Expenditure; 1. Expenditure is a capital expenditure, if it satisfies any one of the following two conditions: (i) The expenditure must create an asset for the government. It is an amount spent to buy a non-current asset. They’re listed on the Income Statement to calculate the net profit of any accounting period. RD = Revenue Expenditure – Revenue Receipts : The fiscal deficit is the difference between the government’s total expenditure (both revenue and capital) and its total receipts excluding borrowings. Its effect is long-term, i.e. In both these cases, the incorrect treatment of expenditure effects the Profit for the year in the Income Statement and Non-Current Assets in the Statement of Financial Position. Unlike revenue expense, capital investment is more to an investment than an expense, since it create better organisation for the company. Capital Expenditures and Revenue Expenditures with Examples Capital Expenditures. Revenue expenditures are charged to expense in the current period, or shortly thereafter. A capital expenditure is not treated as a revenue expenditure on the income statement or the balance sheet. A particular cost can be considered as a capital expenditure for one type of industry and revenue expenditure for another. Plus, capital expenditures will show up differently on your reporting metrics. Difference between capital expenditure and revenue expenditure 1. Capital expenditure is a long-term expenditure, and accordingly has a long-run effect on the business. Revenue expenditure refers to expenses incurred in the day to day running of the business. It’s not enough to say that capital expenditures are everything that revenue expenditures aren’t. Difference between Capital Expenditure andRevenue ExpenditureRevenue Expenditure1. However, treatment of inventory is slightly different. Its effect is temporary, i.e. a) What is the effect if Capital expenditure is incorrectly recorded as Revenue . 16 Capital Expenditure - Examples The cost of assets will be written off by way of depreciation over a period of its life. Unlike capital expenditures, these are not carried forward to future years. The following points of difference between capital expenditure and revenue expenditure gives the importance of the distinction: 1. An expenditure that neither creates assets nor reduces a liability is categorised as revenue expenditure. The reason for charging depreciation to revenue i.e. Cartage and Freight − If those are incurred to bring Fixed Assets. Expenditures which is non-recurring and are quite infrequent in nature are called capital expenditure. If it creates an asset or reduces a liability, it is categorised as capital expenditure. In India, both the Union government and state governments have often been criticised for spending too little on creating assets. Capital expenditures are charged to expense gradually via depreciation, and over a long period of time. Capital Expenditure and Revenue Expenditure! Current expenditures appear in Profit and Loss Accounts Revenue means income but revenue account includes both income and expenditure. An expenditure that neither creates assets nor reduces a liability is categorised as revenue expenditure. It not depleted within an existing accounting year. Neither an … The revenue expenditures just maintain the earning capacity of the business. 2. Capitalize as an asset and charge to expense through depreciation or amortization over the useful life. It gives benefit to the business over more than one accounting year and not intended for resale in the ordinary course of business. The revenue deficit happens when revenue receipts falls short of revenue expenditure. Difference/Distinction between Capital and Revenue Expenditures: The cost of installing an air conditioning unit in an automobile or replacement of a power unit attached to a machine by one of greater capacity should be treated as a capital expenditure. But transactions also cover acquisition of assets, like purchase of an office building, raising a loan, payment of liabilities, etc. To test your knowledge of identifying capital and revenue expenditure, why not try our capital or revenue expenditure quiz. A broader example which will help to distinguish between revenue expenditures and capital expenditures can be done with the example of a purchase of a storage facility of a company. Expense Versus Expenditure An expenditure is a payment, while an expense is a cost that is reported on the profit-and-loss statement. ; all transactions are not expenses or incomes. A capital expenditure is assumed to be consumed over the useful life of the related fixed asset. 2. This is the basis of classification between revenue expenditure and capital expenditure. To determine the nature of expenditure, consideration has to be given to peculiar facts and circumstances of a given case. Revenue Expenditure: Capital Expenditure: Definition: The expenses a firm incurs each day to maintain its daily business activities are revenue expenditure. Every expenditure has its own purpose from the business point of view and the classification between the capital expenditures and revenue expenditures is the most regular common problem for accountants since it has a significant impact … Revenue expenditure is mistakenly treated as Capital Expenditure. ‘Capital v Revenue expenditure’ is a term used throughout this toolkit. Expenditure that is capital is generally not allowable as a revenue deduction in computing taxable profits. Some examples of Capital Expenditures are Capital expenditure constitutes those expenses that are typically incurred while acquiring capital assets or upgrading the current ones. Capital expenditures vs. revenue expenditures. The Concept of Capital and Revenue Expenditure: Expenses, losses, and incomes are also known as revenue items since they together will show up the net profit or revenue earned. it is not exhausted within the current accounting year-its benefit is received for a number of years in future. 3. Capital expenditures comprise major purchases that will be used in the future. Revenue Expenditure: Capital Expenditure: 1. Revenue expenditure is usually recurring expenditure on the day to day trading activities of the business. This is the basis of classification between the two. (Stolowy and J.Lebas 2006, p 234). If you are new to accounting, the difference between capital expenditures and revenue expenditures can seem a bit confusing. Capital Expenditure vs. Revenue Expenditure. Every organization spends money for various purposes, some expenses are incurred to gain more profits and some are for future profit requirements. Revenue expenditures are matched against revenues each month, it is not reflected on the balance sheet the way a capital expenditure is. The expenditure is short term and is included in the income statement for the current accounting period. Any expenditure on the fixed asset after it has been used for a while is treated as Revenue Expenditure eg repairs to the computer; electricity costs. These are recurring in nature and are allocated to the profit and loss account of the same year. The economic benefit will be consumed by the time we pay and it cannot retain for future use. Its benefits received within the existing accounting year. The funds required for the purchase of the storage facility is considered a capital expenditure. It is an amount spent to meet the day to day running costs of the business. the benefit is receivedwithin the accounting year.2. Revenue expenditure is taken into account while computing taxable profits and would be eligible for a tax deduction whereas on capital expenditure only depreciation can be claimed. Capital expenditure versus revenue expenditure debate. Other transactions are of capital nature. profit and loss account is that the asset is used for earning revenue. Difference between Revenue Expenditure and Capital Expenditure. Business expenditures are accounted for in either one of the two ways. All these revenue expenditures are taken to income statements from their respective accounts to find out net profit of the business. It refers to the distinction of capital from revenue expenditure for tax purposes. They are either expensed in the income statement (revenue expenditures) or capitalized as fixed assets in the balance sheet (capital expenditures). Capital investment is expenditure on set properties or increasing their earning capacity. Revenue Expenditure: Definition and Explanation: All the expenditures which are incurred in the day to day conduct and administration of a business and the effect-of which is completely exhausted within the current accounting year are known as "revenue expenditures".These expenditures are recurring by nature i.e. (a) Revenue Expenditure: Capital expenditures are classified into three main sections: Expenditures made to reduce the costs; Expenditures made to increase the revenue; Expenditure which is explainable on the non- economic grounds, that is, the expenses made without any relation to the money related profits. Incorrect treatment of expenditure . If it creates an asset or reduces a liability, it is categorised as capital expenditure. Operating expenditures (expenses) represent day-to-day costs that are necessary to keep a business running. 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