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Difference Between Capital - Revenue Expenditure

Difference Between Capital & Revenue Expenditure Defined

Capital expenditures are purchases a company will make that result in an addition or replacement of an asset. These assets are typically long-term items the company will use to generate sales. Revenue expenditures relate to money spent maintaining the company’s operating facilities and equipment.

Features

Capital expenditures affect balance sheet accounts and can increase the economic wealth of a company. Revenue expenditures are typically classified as expenses, meaning they go against the income a company generates during an accounting period.

Significance

Keeping these two items separate and correctly classified in the company’s accounting books is important. Companies that record revenue expenditures as assets will create a distortion in their accounting figures, resulting in the fraudulent increase of net income.

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Capital and Revenue Expenditure

Capital expenditure
  • Buy fixed assets or
  • Add to the value of an existing fixed asset

    Revenue expenditure
    • Day-to-day running of business

    Think it over
  • Petrol costs for van

  • Putting extra headlights on van

  • Electricity costs of using machinery

  • Painting outside of new building

  • Three years later – repainting outside the same building

    Think it over
    • A builder was engaged to perform some work on your premises, the total bill being $4,500. If one-third of this was for repair work and two-thirds for improvements, what will be the correct accounting treatment?

    Think it over
    • On 1 January 2009, DEP Tour Operator Limited purchased four second-hand tour buses. The list price of the buses was $500,000 each and the supplier gave a $200,000 trade discount because of the bulk purchase. The payment was to be made through four half-yearly equal instalments of $530,000 each. The company spent a further $1,200,000 on each bus for renovations. The freight charges for the delivery of the buses amounted to $108,000. During installation, an accident happened and the company paid a repair cost of $20,000. In order to legalise the use of the buses as tour buses, an inspection fee of $90,000 was paid. An annual licence fee of $80,000 was also paid. You are required to prepare a statement to calculate the cost of the buses. (HKAL 2001)

    Incorrect treatment of expenditure
    • Capital expenditure is incorrectly treated as revenue expenditure
  • Revenue expenditure is incorrectly treated as capital expenditure

    Capital expenditure is treated as revenue expenditure
    • Value of fixed asset is understated
  • Net profit is understated

    Revenue expenditure is treated as capital expenditure
    • Revenue expenditure is treated as capital expenditureValue of fixed asset is overstatedNet profit is overstated

    Think it over

    XYZ Co purchased a new machine at the list price of

    $250,000. The supplier offered a trade discount of 10%.

    The supplier also provided that if the company settled

    the balance within 10 days, a further 10% cash discount

    would be given. XYZ Co promptly settled the debt, taking

    the advantage of both discounts. In addition, the company

    Incurred installation costs of $4,500. The total

    transportation and insurance cost incurred for the shipment

    of the machine amounted to $3,000 and $6,000 respectively.

    $1,200 was paid to the supplier for the maintenance charge

    for the current year.

    Explain how each of the above figures should be

    accounted for by the company. (HKAL 1998)

  • Revenue Expenditures - College Essay

    Revenue Expenditures Revenue Expenditures

    Revenue Expenditures & Capital Expenditures
    Tracey DeSautel
    November 1, 2014
    University of Phoenix
    XACC/291

    In the world of accounting, there are numerous types of expenses that come along with running a business on a day to day basis as well as overall. There are things that break down and add value to the companies assets as well as things that are expensed to run the business on a daily basis. These can break down to two important items and those are Revenue expenditures and Capital Expenditures.
    Revenue expenditures is the amount that is expensed immediately. Thereby being matched with revenues of the current accounting period. Examples include things such as routine repairs because they are charged to a direct account such as “ repairs and maintenances expenses> these do not extend the life or improve the assets for the company.
    Capital expenditures are amounts spent to acquire or improve a long term asset. These can be things such as buildings or even equipment. These are usually recorded in accounts classified as “ property, plants and equipment”. These are charged to depreciation expense over the assets lifespan.
    It breaks down to capital expenditures are for items such as machinery and buildings where as revenue expenditures are for things that create revenue such as advertising and labor.
    A further look into capital expenditures and examples are that, that do not occur in daily transactions for the company and include such purchases that may include the purchase or repair of a office building or new office furniture, additional machinery purchases and purchases of patent rights, and copy rights.
    Revenue Expenditure differs because these are items that are used on a day to day basis that ultimately can affect the overall function and running of the business itself. These can be tiny expenses such as purchasing stationary for the office but do not fall into the category of Capital expenditures because these are tiny expenses. Capital.

    Fm - Capital Expenditure - Essays

    Fm - Capital Expenditure Related Essays

    Capital Expenditure In The Hospitality Industry. capital expenditure, return on investment, funding Capital Expenditures in the Hospitality Industry General accounting principles define capital expenditure What Are Capital Expenditures? capital expenditure. d) Explain what happens if an item of revenue expenditure is treated as capital expenditure? If revenue expenditure is treated as capital The Dilemma Engineer's Face In Balancing Capital Expenditure Versus Optimum Design For Efficient Operations And Maintenance out from market. Therefore, it is an important factor in control capital expenditure in operating an engineering consultant company. As for the present market Capital Expenditures Capital Expenditures Capital Expenditures involve the acquisition of assets that are long lasting, such as equipment, buildings, and land. Capital expenditure

    Submitted by devasish to the category Other Topics on 08/12/2010 11:26 PM

    A capital expenditure may be defined as an expenditure, the benefit of which is spread over a period exceeding one year. The main feature of a capital expenditure is that the heavy expenditure is incurred at one period of time while the benefits of the expenditure are spread at different points of time, in future. Capital expenditure involves exchange of current assets to acquisition of fixed assets. Some of the examples of capital expenditure are

    (A) Purchase or acquisition of permanent assets such as machinery, building, goodwill etc.

    (B) Cost of improvement, addition, expansion or alteration in the fixed assets.

    (C) Cost of replacement of fixed assets.

    (D) Research and development expenditure.

    Capital expenditure decisions are also called as long-term investment decisions.

    DEFINITION AND MEANING OF CAPITAL BUDGETING

    Definition: The investment decisions of a firm are generally known as capital budgeting or capital expenditure decisions. Capital budgeting is concerned with allocation of the firm’s scarce financial resources in long-term projects, the benefits occur over a future period. Capital budgeting may be defined as the firm’s decision to invest current funds in long-term assets to get the benefits over the years.

    The characteristics of capital budgeting or long–term Investment decisions are:

    (A) Exchange of current assets for future benefits.

    (B) Investment of funds in non-flexible and long-term assets or activities.

    (C) Huge Funds are involved.

    (D) Future benefits or cash flows occur over a series of years.

    (E) Decisions are irreversible.

    (F) Significant impact on the profitability of the concern.

    NEED AND IMPORTANCE OF CAPITAL BUDGETING

    Investment decisions are of great importance to any concern. These decisions involve commitment of a large sum of money. They affect the profitability of the enterprise.

    Difference between capital expenditure and revenue expenditure

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    Difference Between Capital Expenditure and Revenue Expenditure (with Comparison Chart) - Key Difference

    Difference Between Capital Expenditure and Revenue Expenditure


    In business, it is very common to spend money to make the profit. A large amount of expenditure is incurred by the company for various purposes to get high returns. The expenditure has been broadly divided into two categories – Capital and Revenue. Prima facie, these two terms seem alike, but they are not similar. Capital Expenditure is an expense made to acquire an asset or improve the capacity of the asset. Unlike Revenue Expenditure, which is an expense made for operating day-to-day activities of the business. The difference between Capital and Revenue is explained here.

    Content: Capital Expenditure Vs Revenue Expenditure Comparison Chart

    Basis for Comparison

    The expenditure incurred in acquiring a capital asset or improving the capacity of an existing one, resulting in the extension in its life years.

    Expenses incurred in regulating day to day activities of the business.

    Definition of Capital Expenditure

    The amount spent by the company for possessing any long-term capital asset or to enhance the working capacity of any existing capital asset, or to increase its lifespan to generate future cash flows or to decrease the cost of production, is known as Capital expenditure. As a huge amount is spent on it, the expenditure is capitalized, i.e. the amount of expenditure is spread over the remaining useful life of the asset.

    In a nutshell, the expenditure which is done for initiate current as well as the future economic benefit is capital expenditure. It is a long-term investment done by the entity, in the name of assets, to create financial gain for the years to come. For example – Purchase of Machinery or installation of equipment to the machinery which will improve its productivity capacity or life years.

    Definition of Revenue Expenditure

    The expenditure which is incurred on a regular basis for conducting the operational activities of the business are known as Revenue expenditure like the purchase of stock, carriage, freight, etc. As per the accrual accounting assumption, the recognition of revenues is done when they are earned while expenditure is recognized when they are incurred. Therefore, the revenue expenditure is charged to the Income Statement as and when they occur. This satisfies the fundamental principle of Accounting i.e. Matching Principle in which the expenses are recorded in the period of their incurrence.

    The benefit generated by the revenue expenditure is for the current accounting year. The examples of revenue expenditure are as under – Wages & Salary, Printing & Stationery, Electricity Expenses, Repairs and Maintenance Expenses, Inventory, Postage, Insurance, taxes, etc.

    Key Differences Between Capital and Revenue Expenditure
    1. Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only.
    2. The major difference between the two is that the Capital expenditure is a one-time investment of money. On the contrary, revenue expenditure occurs frequently.
    3. Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income Statement (depreciation), but Revenue Expenditure is shown only in the Income Statement.
    4. Capital Expenditure is capitalized as opposed to Revenue Expenditure, which is not capitalized.
    5. Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure is a short term expenditure.
    Example

    If a company deals in computers and opens a new branch at a different location for which it acquires a building. The acquisition of the building will be a capital expenditure while the purchase of computers will be a revenue expenditure. Let’s look it another way, If a company is involved in property dealing business the purchase of the buildings will be a revenue expenditure while the purchase of machinery would be a capital expenditure.

    Note: Here you must focus on the intention of expenditure.

    Conclusion

    Capital Expenditure and Revenue Expenditure both are important for business for earning a profit in the present as well as in subsequent years. Both have its own merits and demerits. In the case of a capital expenditure an asset has been purchased by the company which generates revenue for upcoming years. On the other hand, no asset is acquired as such in the case of a Revenue Expenditure.

    Related Differences

    Capital expenditure and Revenue expenditure

    Capital Expenditure

    Capital expenditure occurs when a business gets a long term advantage due to that expenditure.

    It is usually incurred for accusation of an asset. These expenditures do not occur in the regular day to day transactions of the business.

    • Purchase of furniture, office building etc.
    • Purchase of additional furniture or machinery
    • Expenditure incurred in connection with the purchase of a fixed asset. For example, carriage paid of machinery purchased.
    • Purchase of patent right, copy rights etc.
    Revenue Expenditure

    Expenditure which is not for increasing the value of fixed assets, but for running the business on a day to day basis, is known as revenue expenditure.

    Difference between Capital and Revenue expenditure

    Buy a car is capital expenditure because its benefit to the business will be spread over a long time.

    Fuel cost for running this care is revenue expenditure and it will be used up in few days and does not add to the value of the fixed asset.

    Capital receipts

    Capital receipts consist of

    • additional payments made to the business either by owner or shareholder of the business; or
    • from sale of fixed assets of the business.
    Revenue receipts
    • Any receipt in the normal running or through day to day transactions of the business is categorized as Revenue receipt.
    • Sales receipts of the business are revenue receipts.