The basic difference between capital expenses and revenue expenses is whether they are long-term or short-term investments. Capital expenditure (CapEx) is incurred by a company to acquire physical and intangible assets like property, machinery, equipment, patents, copyrights, and others. Revenue expenditures on the other hand are for a short period and recurrent in nature. They are not capitalised and involve maintenance of equipment and machinery, rent, salary/ wages, and others. These are incurred to facilitate the smooth day-to-day functioning of the business.
Did you know?
Capital assets like vehicles have a salvage value at the end of their lifespan. The salvage value reduces the amount of depreciation charged.
What is Capital Expenditure?
Capital expenditures are mainly one-time lumpsum expenditures used to purchase or upgrade assets. These assets over a long period of time will generate revenue for the business. These are funds invested by businesses to upgrade, acquire, and maintain the fixed assets of the company.
What is Revenue Expenditure?
Revenue expenditures are the expenses incurred by the business on a daily basis. These are short-term expenses for the ongoing operations of the business i.e., the day-to-day expenditure of the business. Revenue expenditure is similar to operating expenses as it involves the operational costs of running a company.
It also includes repair and maintenance costs of assets. This expenditure is needed to keep the assets in good working condition and thus improve their efficiency and output. The repainting and renewal of older assets are accounted for under revenue expenditure.
These expenses are recurring in nature and are to be settled regularly. Also, these expenses reduces the yearly tax burden of a business. As they are subtracted from the revenue generated amount, the total taxable income of the business decreases.
Types of Capital Expenditures (CapEx)
Capital expenditures vary depending on the type of industry. Some of the capital expenditures are:
- Buildings and Property.
- Upgrades to Equipment.
- Software Upgrades.
- Computer Equipment.
- Intangible Assets.
Buildings and Property
Purchase of a building or upgrading a property comes under the capital expenditure head since the asset will prove beneficial in the coming years. Such capital purchases of plants, equipment, and property are made through secure debt or a mortgage. The payments are delivered over a long period. Expenditure incurred for repayment of the debt financing depreciates, as does the cost of the asset acquired.
Upgrades to Equipment
The machinery and other associated equipment in the manufacturing and similar other industries become redundant or wear out. Regular upgrades to maintain the equipment are needed for them to run smoothly so that the production does not get stalled. If the cost of the upgrades is more than the capitalisation limit, it will involve depreciation of cost over a period. As is the case of property, buildings, and others, the equipment upgrades too may be financed, and the financing cost may be depreciated.
In large companies, the expenditure on acquiring or upgrading software is significant, and these are considered to be Capital expenditures and may depreciate if it meets certain criteria. As per the accounting guidance, expenses on research and development for creating new software should also be capitalised and depreciated. Such expenses may include fees paid to parties who work towards the development of the software, costs incurred to acquire the software, payments to the employees helping with the development work, or travel expenses of the associated work.
If the technology, computer equipment, and peripherals fall into the specified criteria, they, too, will come under capital expenses. Usually, such equipment has a lifespan of more than a year if not, it will not be considered capital expenditure.
Businesses need to maintain a large number of vehicles for various requirements. For delivery or distribution companies, the requirement is higher. These vehicles, whether acquired outright or financed, come under capital expenses since they will add to the revenue earned by the business. If the vehicles are acquired on a lease, the associated cost is considered operational expenses.
Assets acquired under capital expenditure need not always be physical assets. In certain cases, they can be intangible too. If a company purchases a license or a patent, it will be termed capital expenditure.
Types of Revenue Expenditures
The types of revenue expenditures are mentioned below:
- Repair and Maintenance of the Assets.
- Wages paid to the workers.
- Selling Expenses.
- Expenses incurred on rent.
- Other Expenses.
Repair and Maintenance of the Assets
The costs of repairing and maintaining assets like machinery and equipment are considered revenue expenditures. This is because the assets involved generate revenue for the company, and expenses are incurred so that the business operations run smoothly. These repairs do not increase the life of the asset.
Wages Paid to Workers of the Factory
Wages of the workers involved in the day-to-day operations of the business are also considered revenue expenditure as it is a recurring expenditure.
Utility expenses like electricity bills, phone bills, and others that the company spends to continue business operations and generate revenue too are termed revenue expenditure.
Selling expenses are necessary as it involves promoting and marketing the products. Since the money is being spent on expanding the market and increasing sales, they are also considered revenue expenditures.
The expenses for renting the business premises or other materials are a recurring expenditure and hence comes under the ambit of revenue expenditure.
Other recurring expenses may either generate revenue or maintain the capital assets too are referred to as revenue expenses.
The Formula of Capital Expenditure
The formula to calculate capital expenditure is mentioned below:
CapEx = ΔPP&E current depreciation
CapEx = Capital expenditures
ΔPP&E = Change in property, plant, and equipment
Difference Between Capital Expenditure and Revenue Expenditure
The difference between capital and revenue expenditure is mentioned below:
Capital expenditures are one-time, long-term investments that are significant and beneficial to the business, whereas revenue expenses are short-term and recurring in nature.
Capital Expenditure: long-term expense.
Revenue Expenditure: short-term expense.
- Value Addition
Capital expenditure enhances the value of the already existing assets, whereas revenue expenditure does not enhance the value of any pre-existing asset.
- Physical Presence
Capital expenditure has a physical presence, but intangible assets and revenue expenditure do not have a physical presence.
Capital expense is a one-time expenditure and is non-recurring, whereas revenue expenditure is recurring.
In capital expenditure, capitalisation is available, but it is not available in revenue expenditure.
- Impact on the business revenue
Capital expenditure has no impact on revenue, and revenue expenses decrease the revenue of the business.
Capital expenses are a long-term benefit for a business, and revenue expenditures are short-term benefits.
Capital expenses are shown as assets on the Balance sheet and in certain parts of the income statement, and revenue expenses are always mentioned in the income statements.
We hope this article has been of help in providing information about the difference between capital expenditure and revenue expenditure. Here at Khatabook, we provide precise and accurate information to our readers. Capital expenditure and revenue expenditure are significant to a business. Since both are required for any business to function smoothly.
Capital expenditure is incurred to provide a backbone or infrastructure for the business to stand. The revenue expenditure is vital as it maintains the day-to-day functioning of the business and ensures that the business operations work efficiently. In a good business, both expenses are monitored to ensure no overspending.
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