A business organisation incurs expenditures for various purposes during its existence. Some of these expenditures are meant to bring in more profits for the organisation in the long-term, while some expenditures are for the short-term.
The main reason for incurring expenditure is to increase the efficiency of the business and drive in higher returns. Based on the nature of the expenditure, they are categorised as capital expenditure and revenue expenditure.
Meaning of Capital Expenditure
The expenditures that are incurred by an organisation for long-term benefits are known as capital expenditures. These expenditures serve the purpose of increasing the capacity or capabilities of the long-term asset by either enhancing or adding new assets to the organisation.
These expenditures are added on the asset side of the balance sheet. It is done mostly on assets such as land, equipment, furnishings, or vehicles that help to drive benefits for the organisation by increasing the operating capability.
Meaning of Revenue Expenditure
Revenue expenditure is referred to the expenditure incurred by an organisation to manage the day-to-day functions of a business which include employee wages, inventory, rent, electricity, insurance, stationery, postage, and taxes.
These are the expenditures that neither help in the creation of assets nor in reducing the liabilities of a business. It is recurring in nature and very essential to maintain the daily operations of a business or an organisation.
Revenue expenditures can be divided into two categories
1. Expenditures for generating revenue for a business: These are the expenditures that are essential for meeting the operational cost of a business, hence these are classified as operating expenses.
2. Expenditures for maintaining revenue-generating assets: Such expenses are incurred by business towards repair and maintenance of the assets of an organisation to keep them in working condition without enhancing their lifespan. Such expenses can be towards repairing and repainting of assets.
Let us look into the key differences between capital expenditure and revenue expenditure to develop a clear understanding of their functions in a business.
|Expenditure incurred for acquiring assets, to enhance the capacity of an existing asset that results in increasing its lifespan||Expense incurred for maintaining the day to day activities of a business|
|Long Term||Short term|
|Enhances the value of an existing asset||Does not enhance the value of an existing asset|
|Have a physical presence except for intangible assets||Do not have a physical presence|
|Non-recurring in nature||Recurring in nature|
Availability of Capitalisation
Impact on Revenue
|Do not reduce business revenue||Reduces business revenue|
|Long-term benefits for business||Short-term benefits for business|
|Appears as assets in the balance sheet and some portion in the income statement||Always appears in the income statement|
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