Capital Expenditures vs.

Revenue Expenditures:
What's the Difference?
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J.B. MAVERICK

 
 
Updated Oct 30, 2020
Capital Expenditures vs. Revenue Expenditures: An
Overview
The differences between capital expenditures and revenue expenditures include
whether the purchases will be used over the long-term or short-term. Capital
expenditures (CAPEX) are funds used by a company to acquire, upgrade, and
maintain physical assets such as property, buildings, or equipment.

Capital expenditures are typically one-time large purchases of fixed assets that

will be used for revenue generation over a longer period. Revenue expenditures
are typically referred to as ongoing operating expenses, which are short-term
expenses that are used in running the daily business operations.

KEY TAKEAWAYS

 Capital expenditures (CAPEX) are funds used by a company to acquire,

upgrade, and maintain physical assets such as equipment.
 Capital expenditures are typically one-time large purchases of fixed assets
that will be used for revenue generation over a longer period. 
  Revenue expenditures are the ongoing operating expenses, which are
short-term expenses used to run the daily business operations.
Revenue Expenditures
Revenue expenditures are short-term expenses used in the current period or
typically within one year. Revenue expenditures include the expenses required to
meet the ongoing operational costs of running a business, and thus are
essentially the same as operating expenses (OPEX).

Revenue expenditures also include the ordinary repair and maintenance costs
that are necessary to keep an asset in working order without substantially
improving or extending the useful life of the asset. Revenue expenses related to
existing assets include repairs and regular maintenance as well as repainting and
renewal expenses. Revenue expenditures can be considered to be recurring
expenses in contrast to the one-off nature of most capital expenditures.

Types of Revenue Expenditures

Other examples of revenue expenditures include the following:

 Salaries and employee wages

 Any overhead expense, such as salaries for the corporate office, which
typically fall under selling, general, and administrative expenses (SG&A)
 Research and development (R&D)
 Utilities and Rent
 Business travel
 Property taxes

Revenue Expenditures Accounting Treatment

Revenue expenditures or operating expenses are recorded on the income
statement. These expenses are subtracted from the revenue that a company
generates from sales to eventually arrive at the net income or profit for the
period.

Revenue expenses can be fully tax-deducted in the same year the expenses

occur. In other words, the expenses reduce profit from a tax standpoint, and thus,
reduce the taxable income for the tax period.

Capital Expenditures
Capital expenditures represent significant investments of capital that a company
makes to maintain or, more often, to expand its business and generate additional
profits. Capital expenditures consist of the purchase of long-term assets, which
are assets that last for more than one year but typically have a useful life of many
years.
Capital expenditures are often used for buying fixed assets, which are physical
assets such as equipment. As a result, capital expenditures are typically for
larger amounts than revenue expenditures. However, there are exceptions
when large asset purchases are consumed in the short term or the
current accounting period. 

Types of Capital Expenditures

Capital expenditures can include the purchase of the following:

 A facility or factory, including an upgrade or expansion

 Vehicles, such as trucks used for the delivery of products
 Manufacturing equipment
 Computers
 Furniture

Capital expenditures are often used to undertake new projects or investments by

a company. Typically, the purpose of CAPEX is to expand a company's ability to
generate revenue and earnings. Conversely, revenue expenditures are the
operational expenses for running the day-to-day business and the maintenance
costs that are necessary to keep the asset in working order.

Companies often use debt financing or equity financing to cover the substantial

costs involved in acquiring major assets for expanding their business. Debt
financing can involve borrowing money from a bank or issuing corporate bonds,
which are IOUs to investors who buy them and get paid interest periodically.
Equity financing involves issuing shares of stock or equity to investors to raise
funds for expansion and capital improvements.

CAPEX Accounting Treatment

The purchases or cash outflows for capital expenditures are shown in the
investing section of the cash flow statement (CFS). The CFS shows all of the
inflows and outflows of cash in a particular period. When a company buys
equipment, for example, they must show the cash outflow on their CFS. In
addition, the equipment must also be recorded within total assets on the balance
sheet.

Since long-term assets provide income-generating value for a company for a

period of years, companies are not allowed to deduct the full cost of the asset in
the year the expense is incurred. Instead, they must recover the cost through
year-by-year depreciation over the useful life of the asset.
In other words, the cost of capital expenditures is spread out over many periods
or years, whereas revenue expenditures are expensed in the current year or
period.

 
While keeping operating expenses under control can boost profit in the short-
term, CAPEX spending can grow revenue in the long-term.

Example of Capital and Revenue Expenditures

Tesla Inc. (TSLA) is an automobile manufacturer of electric vehicles. Below is a
truncated portion of the company's income statement and cash flow statement as
of the company's 10-Q report filed on June 30, 2020.1

Revenue Expenditures
As stated earlier, revenue expenditures or operating expenses are reported on
the income statement, which are highlighted in blue below.

 Total operating expenses for Tesla were $940 million for Q2 2020.
 The Q2 2020 revenue expenditures decreased from $1.088 billion that was
reported in Q2 2019.
 We can also see that the $148 million reduction in OPEX ($1,088 - $940),
in 2020 directly helped the company's net income for that quarter, in which
a $327 million net income gain was recorded.

Image by Sabrina Jiang © Investopedia 2020

Capital Expenditures
The cash outflows for CAPEX are shown in the investing section of the cash flow
statement.

 Total capital expenditures for Tesla were $1.046 billion for Q2 2020.
 The Q2 2020 CAPEX figure was an increase from $547 million reported in
Q2 2019.
 We can see that the increase was the result of $1.001 billion in purchases
of property and equipment as well as $46 million in purchases of solar
energy systems.

Image by Sabrina Jiang © Investopedia 2020

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 The difference between capital
expenditures and revenue expenditures
April 13, 2021
Capital expenditures are for fixed assets, which are expected to be productive assets for a long
period of time. Revenue expenditures are for costs that are related to specific revenue
transactions or operating periods, such as the cost of goods sold or repairs and maintenance
expense. Thus, the differences between these two types of expenditures are as follows:

 Timing. Capital expenditures are charged to expense gradually via depreciation, and over
a long period of time. Revenue expenditures are charged to expense in the current period, or
shortly thereafter.

 Consumption. A capital expenditure is assumed to be consumed over the useful life of

the related fixed asset. A revenue expenditure is assumed to be consumed within a very short
period of time.

 Size. A more questionable difference is that capital expenditures tend to involve larger
monetary amounts than revenue expenditures. This is because an expenditure is only classified as a
capital expenditure if it exceeds a certain threshold value; if not, it is automatically designated as a
revenue expenditure. However, certain quite large expenditures can still be classified as revenue
expenditures, as long they are directly associated with revenue transactions or are period costs.
Difference between Capital Expenditure and Revenue
Expenditure
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.

Capital Expenditure Revenue Expenditure

Definition
 Expenditure incurred for acquiring assets, to enhance the Expense incurred for maintaining the day
capacity of an existing asset that results in increasing its lifespan to day activities of a business

Tenure

Long Term Short term

Value Addition

Enhances the value of an existing asset Does not enhance the value of an
existing asset

Physical Presence

Have a physical presence except for intangible assets Do not have a physical presence

Occurrence

Non-recurring in nature Recurring in nature

Availability of Capitalisation

Yes No

Impact on Revenue

Do not reduce business revenue Reduces business revenue

Potential Benefits

Long-term benefits for business Short-term benefits for business

Appearance

Appears as assets in the balance sheet and some portion in the Always appears in the income statement
income statement

This article was all about the topic of Difference between Capital Expenditure and Revenue
Expenditure, which is an important topic for Commerce students. For more such interesting
articles, stay tuned to BYJU’S.
Difference between Capital
Expenditure and Revenue
Based on their duration, expenses can be categorised as capital expenditure and

revenue expenditure. Business entities need to identify the costs incurred by way of

these categories to account for them accurately. Also, being familiar with their

fundamentals and point of differences will help manage them more effectively and in

turn, enable sustainable earnings.

In this article [show]

What is Capital Expenditure?

Capital Expenditure or CAPEX make up those funds which are put to use to acquire,

maintain or upgrade long-term assets. Typically, such expenses do not occur

frequently and are incurred to boost a company’s proficiency in the long-term.

Some potent capital expenses include – purchasing tangible assets like plant, plot,

equipment, furniture, fixtures, etc. and intangible assets like – patent, license or

trademark.

Generally, CAPEX influences a firm’s short-term and long-term financial standing and

also helps to boost its overall operations over the years. The formula of CAPEX is

given as –

Capital expenditure = Net increase in PP & E + Depreciation Expense

The same is stated in a firm’s Cash Flow Statement and is also acknowledged in its

Balance Sheet, right under the header of fixed assets. It must be noted here that

capital expenditure is capitalised. Further, depreciation is charged on CAPEX every

 year and is among the prominent differences between capital expenditure and

revenue expenditure.
Types of Capital Expenditure
Capital expenditure is divided into these 3 distinct groups –

I. Expenses that a firm incurs to lower cost.

II. Expenses that help to boost overall earnings.

III. Expenses made on non-economic grounds.

In terms of outlay, CAPEX is distributed under these headers –

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 Routine Expenditure

 Major projects

 Replacement

With this in the account, let us proceed to become familiar with the fundamentals of

revenue expenses to gain a better understanding of the distinction between capital

and revenue expenditure.

What is Revenue Expenditure?

Revenue expenditure  or OPEX accounts for those expenses that a firm incurs during

its course of operation. It can be defined as the total expenses that are incurred by

firms through their course of production activities. Under normal circumstances, such

costs do not result in asset creation, and the benefits resulting from OPEX is limited

to one accounting year.

Typically, they are not responsible for generating or boosting the profit earning

capacity of a company. Regardless, they play a key role in the aspect of managing

operational activities and assets more optimally and are also considered vital for

generating revenue within a given accounting period.

Some of the many revenue expenditure examples include – rent, salaries, wages,

commission, freight charges, etc. Notably, factors like the nature of the business

operation, the purpose of a venture, frequency of activities, etc. prove useful in

categorising expenses as OPEX.

As far as accounting treatment is concerned, revenue expenditure for an accounting

period is stated in a firm’s Income Statement. However, the same is not reported in

the firm’s Balance Sheet. Also, such expenses may be applicable for tax deductions
 in a given accounting period because of their recurrence. It must also be noted that

OPEX is not capitalised and depreciation is not levied on such expenses.

Types of Revenue Expenditure

In a general sense, types of revenue expenditure can be categorised under 2 distinct

groups, namely –

 Direct expenses

These types of expenses are mostly incurred through the production process. The
most common direct expenses include – direct wages, freight charge, import duty,

commission, rent, legal expenses and electricity cost.

 Indirect expenses

These expenses pertain to the sale and distribution of finished goods or services.

They include expenses like selling salaries, repairs, interest, commission,

depreciation, rent and taxes, among others. Such costs may also include the money

spent during the management of recurrent administrative expenses.

With that information, let’s proceed to find out how similar or different capital

expenses and revenue expenses are from one another.

Capital and Revenue Expenditure Examples

Take a look at the examples below to understand the placement of capital and

revenue expenditure in the books of accounts –

 Capital Expenditure Example

Suppose this is an excerpt of the Income Statement of ADZ Ltd. as on 30th March

2018
 Particulars Amount (Rs.)

Cash flow from operating activities 4,37,86,000

Cash flow from investing activities -1,10,08,800

Net change in cash 3,27,77,200

Opening cash balance 6,09,31,100

Closing cash balance 9,01,18,800

Free cash flow

Operating cash flow 4,73,87,000

Capital expenditure -1,60,43,300

Free cash flow 3,13,43,700

 Revenue Expenditure Example

Suppose this is an excerpt of the Balance Sheet of Sunflower Ltd. as on 30th March

2019

Particular Amount (Rs.)

Total revenue 6,37,63,00

Cost of revenue 3,51,20,600

Gross profit 2,87,44,300

Operating expenses

Selling general and administration 1,64,00,300

 Total operating expenses 2,23,00,300

Difference between Capital and Revenue Expenditure

The table below highlights the prominent differences between capital expenditure and

revenue expenditure –

Parameters Capital Expenditure Revenue Expenditure

Capital expenditure is the Revenue expenditure is the

money spent by a firm to money spent by business
Definition
acquire assets or to improve the entities to maintain their
quality of existing ones. everyday operations.

Revenue expenses are incurred

Capital expenses are incurred for a shorter-duration and are
Time span
for the long-term. mostly limited to an accounting
year.

CAPEX is stated in a firm’s OPEX is stated in a firm’s

Treatment in
Cash Flow Statement. It also Income Statement but is not
accounting
appears in the Balance Sheet of necessarily reported in its
books
a company under fixed assets. Balance Sheet.

Such expenses are borne by a Such expenses are borne by a

Purpose company to boost its earning company to sustain its
capacity. profitability.

The yield of these expenses is The yield of these expenses is

Yield not limited to a year and is mostly limited to the current
usually long-term in nature. accounting period.

Typically, CAPEX is not quite OPEX makes up recurrent

Occurrence
recurrent. expenses.

Capitalisation of Capital expenses are Revenue expenses are not

 expenses capitalised. capitalised.

Treatment of Depreciation of assets is Depreciation of assets is not

depreciation charged on capital expenses. levied on revenue expenditure.

Wages, salary, utility bills

Purchase of Machinery or printing and stationery,
Examples patent, copyright, installation of inventory, postage, insurance,
equipment and fixture, etc. taxes and maintenance cost,
among others.

Hence, both capital expenditure and revenue expenditure are vital for the sustainable

profitability of a business venture. Mostly, revenue expenses are a periodic

investment which does not result in immediate or delayed benefit. However, it is used

to keep operations running uninterruptedly.

Alternatively, capital expenditure is considered to be a long-term investment that

proves beneficial for a firm. Business entities must understand that they need to

adopt effective strategies to monitor and regulate these expenses to boost overall

profitability significantly.
 Difference between Capital
Expenditure and Revenue
Expenditure
19814 views


8 
What is Capital Expenditure, Revenue Expenditure & Deferred Revenue
Expenditure and the difference between Capital Expenditure and
Revenue Expenditure is as under-
 
See related posts : Classification of Assets and Liabilities
 
What is Capital Expenditure-
Expenses incurred for purchase or erection of fixed assets i.e. Land, Building,
Plant & Machinery, Furniture, Equipment, Vehicles etc. i.e. capital assets are
called Capital Expenditure. Such expenditure yields benefit over a long period
and hence written in Assets.
For Example, Plant & Machinery purchased for Rs. 5,20,000 on 25.07.2018,
the value of plant & machinery will be shown under the head “Fixed Assets” of
the Balance Sheet for that financial year but deprecation will be charged
under Profit & Loss Account and it will be deducted from the cost of the Plant
& Machinery.
 
What is Revenue Expenditure-
Expenses incurred where the full benefit of which is received during one
accounting period is termed as revenue expenditure, such expenses are
debited to Trading and Profit & loss Account.  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. Revenue Expenditures does not result in an increase in
the earning capacity of the business but only helps in maintaining the existing
earning capacity.
For Example, the following expenses i.e. Wages & Salary, Printing
& Stationery, Electricity Expenses, Repairs and Maintenance Expenses,
Inventory, Postage, Insurance, taxes, etc. will be charged to Profit & Loss
Account, it will not to be shown under the Balance Sheet.
 
What is Deferred Revenue Expenditure-
There are certain expenditures which are revenue nature but the benefit of
which is likely to be derived over a number of years. Such expenditures are
termed as “Deferred Revenue Expenditures”. The benefit of such expenditure
generally lasts between 3 to 7 years. The whole expenditure is not debited to
the Profit and Loss Account of the current year but spread over the years for
which the benefit is likely to last, only a part of such expenditure is taken to
Profit & Loss Account every year and the unwritten off portion is allowed to
stand on the assets side of the Balance Sheet.
For Example, Amount spent of Rs. 5,00,000 on advertising to introduce a new
product in the market and it is estimated that the benefit will last for 5 years,
then Rs. 1,00,000 will be charged every year to profit & loss account and
balance amount shown on the Assets side of the Balance Sheet.
 
See related posts : Difference between Partnership Firm and Limited
Liability Partnership Firm
 
Difference between Capital Expenditure and Revenue Expenditure-
Particulars Capital Expenditure Revenue Expenditure

Capital Expenditure is incurred for

Revenue Expenditure is incurred for the
Nature the acquisition or erection of a
day to day running of the business.
fixed asset.

Revenue Expenditure is incurred for

Capital Expenditure is incurred for
maintenance of earning capacity i.e. for
Capacity the purpose of increasing the
keeping the assets in an efficient working
earning capacity of the business.
order.

Capital Expenditure yields benefit Revenue Expenditure yields benefit for a

Benefit
normally over a long period. maximum period of one year.

Deprecation will be charged on There is no Deprecation will be charged

Deprecation
Capital Expenditure every year. on Revenue Expenditure.
 Capital Expenditure is not written
Profit & Revenue Expenditure is written in Trading
in Trading or Profit & Loss
Loss or Profit and Loss Account.
Account.

Revenue Expenditure is not written in

Balance Capital Expenditure is written in
Balance Sheet, these effected profit & loss
Sheet Balance Sheet under Fixed Assets.
account.

 
See related posts : How to calculate amount of gratuity exemption and
their tax liability
Difference Between Capital
Expenditure and Revenue Expenditure
 Commerce

 Difference Between Capital Expenditure and Revenue Expenditure

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FAQ
Every organisation, firm, company and even the Indian Government incurs
several forms of expenditure for various reasons. Some of these reasons include
generation of higher revenue and others may involve investment strategies to
bolster maintenance or finance business expansions which would help the entire
organisation in the long run.
So, when companies prepare their upcoming calendar budget, they categorise it
into two parts, i.e. expenditure and receipts, which can be further subdivided into
its revenue and capital variants. 
The primary concern for companies and organisational bodies in incurring
expenditure is to improve the overall efficiency of the business, which in turn
transcends to increased profit returns. In the branch of commerce, understanding
the difference between capital expenditure and revenue expenditure helps
students to realise the fundamentals of the budget allocation of a company, firm,
or an entire nation. 

What is Capital Expenditure?

Capital Expenditure also referred to as CapEx, is regarded as the funds used by
a company, firm, enterprise or an organisation to acquire, upgrade and maintain
its fixed assets. Such assets include its PP&E (i.e. its Plants, Property and
Equipment) which are mainly, workstations, machinery, infrastructure, etc. Such
assets are usually long-term and offer productivity for more than one accounting
period.
When any enterprise or organisation makes investments on assets for generation
of profit in the days to come, such expenditures are mainly capital in nature.
Through capital expenditure, companies and firms can buy new equipment or
even use it for maintenance of assets. 

Example:
Examples of capital expenditures include the following –
 Office buildings (expenses concerning acquisition and sustenance of a
building/s)
 Workplace equipment like computers, printers, coffee machines, furniture,
other appliances, etc.
 Patents, copyrights, trademarks, etc.
Since such assets offer income-generating value for an organisation for a certain
period, organisations are not allowed to subtract the total cost of the asset in the
year when such capital expenditure is incurred. Instead, the organisation must
recover the cost of such assets by annual depreciation over the years the asset
is being of use to the organisation.

What is Revenue Expenditure?

Revenue Expenditure also referred to as Income Statement Expenditure, are
considered as those expenses which are incurred on a day to day basis. In
simple terms, it is the total amount of expenses of a company, firm or an
organisation incurred for maintaining its earning capacity.
In the case of Revenue Expenditures, the costs are related to those assets which
are not capital in nature since they do not offer financial benefits beyond the
current accountable year. It means that companies or firms incurring such
expenditure recognises these costs and post them in full on the Income
Statement in the year of their occurrence. 

Moreover, Revenue Expenditures can be categorised into two types which are –
1. Expenditures for Revenue Generation
Such expenditures include those day-to-day expenses that are required to run a
business efficiently.

2. Expenditures for Maintenance of Revenue-Generating Assets

Such expenditures include repair and maintenance of assets which are estimated
to generate revenue for the current accounting year and beyond.

Examples:
Examples of revenue expenditures include the following –
 Employee salaries
 Cost of supplies
 Marketing and advertising costs of the organisation
 Commissions paid to executives and franchises
 Telecommunication expenses of the company
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. The funds required for the purchase of the storage
facility is considered a capital expenditure. In contrast, the painting and
refurbishing costs are denoted as revenue expenditure since it does not promote
the asset in generating more income.

To develop a clear understanding of the essential differences between capital

and revenue expenditure, consult the details tabulated below –
Difference Between Revenue Expenditure and Capital Expenditure
Points of
Capital Expenditure Revenue Expenditure
Difference

Expenses incurred by an Expenses incurred by

organisation to acquire, maintain or an organisation to
Meaning
expand its revenue-generating maintain its earning
assets. capacity.

Term  Capital Expenditures serve long- Revenue Expenditures

 serve short-term
term objectives.
requirements.
Capital Expenditures possess Revenue Expenditures
Physical
physical significance except for have no physical
significance
intangible assets significance.
Revenue Expenditures
Occurrence of Capital Expenditures are usually
are usually recurring in
recurring non-recurring in nature
nature.

Revenue Expenditures
Addition of Capital expenditures add value to
do not add value to any
Value existing assets.
existing assets.

Capital Expenditures are always

mentioned in an organisation’s Revenue Expenditures
balance sheet while some elements are always mentioned in
Mentions
of it may also be included in the the Income Statement of
Income Statement of an an organisation
organisation. 
In the case of Revenue
In the case of Capital Expenditures,
Benefits Expenditures, the
the company attains long-term
offered company attains short-
benefits.
term benefits.

Capitalisation Yes No

At Vedantu, we hope that the above discussion on the differences between

revenue and capital expenditure has helped to instil a clear idea on the topic. We
offer study material on other chapters of Class 11-12 Commerce. Make sure to
visit our official website to join our fun and interactive learning program!
FAQ (Frequently Asked Questions)
1. What are Capital and Revenue Expenditure? State Examples

The expenses incurred by an organisation to acquire, maintain or expand its revenue-generating

assets are known as capital expenditure, whereas the expenses incurred by an organisation to
maintain its earning capacity is regarded as revenue expenditures. Examples of Capital
expenditures are construction or purchase cost of office property, machines, etc. while employee
salaries, cost of supplies, etc. are considered as revenue expenditures.
2. With the Help of a Single Example, Show Capital Expenditure vs. Revenue Expenditure.

If a company purchases a storage facility, the purchase cost is an example of capital expenditure
while the cost of painting, refurbishing and other decorations are examples of revenue expenditures.
 Difference Between Capital Expenditure and
Revenue Expenditure
 Last Updated on 24 May, 2021
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Home » Blog » Difference Between Capital Expenditure and Revenue Expenditure

Difference between capital and revenue

expenditure
Topics covered in this Article are as follows:

1. Capital and Revenue Expenditures and Receipts

       1.1 Capital and Revenue Expenditure

             1.1.1 Capital Expenditure

             1.1.2 Revenue Expenditure

             1.1.3 Deferred Revenue Expenditure

      1.2 Capital and Revenue Receipts

1. Capital and Revenue Expenditures and Receipts

The main functions of accounting include the ascertainment of profit/loss for an accounting period and
financial position as at the end of that period. The distinction between capital and revenue items is important
both from the Income Statement (Profit and Loss Account) as well as the Position Statement (Balance Sheet)
point of view. For example, if a depreciable asset is purchased, the depreciation on that asset is charged to the
Profit and Loss Account, and the written down value of the asset (or original cost of the asset less accumulated
depreciation) is shown in the Balance Sheet. If the purchase of a depreciable asset, which is a capital
expenditure, is treated as revenue expenditure it will understate the profit of the current year and overstate the
profits of the subsequent years. Similarly, the Balance Sheet will not give a true and fair view of the assets and
equity of the enterprise till the useful life of the asset is over assuming that the asset is not sold earlier.
Capital and revenue item is divided into

1. capital and revenue expenditure;

2. capital and revenue receipts.

1.1 Capital and Revenue Expenditure

According to Guidance Note on terms used in financial statements issued by ICAI, “Expenditure is incurring a
liability, disbursement of cash or transfer of property for the purpose of obtaining assets, goods or services”.
Thus expenditure may or may not involve outflow of cash. It includes the purchase of capital or long-lived
asset, goods for the purpose of sale or for getting services. Expenditures are divided into three categories :

1. capital expenditure
2. revenue expenditure, and
3. deferred revenue expenditure

1.1.1 Capital Expenditure

Expenditure that acquires a capital asset is capital expenditure. If it acquires stock-in-trade, then it is revenue
expenditure. A capital asset is one that is used in or for the purposes of the business and not meant for sale in
the ordinary course of business of the enterprise. Purchase of stock-in-trade is not capital expenditure as it is
sold in the ordinary course of business. Expenditure on the purchase and installation of machinery is a capital
expenditure. Further when an expenditure is made with a view to bringing into existence an asset or advantage
for the enduring benefit of trade is a capital expenditure in the absence of special circumstances leading to the
opposite conclusion.

Asset or advantage of enduring nature means that it must not be fully consumed or used up in the accounting
period in which it is incurred. Capital expenditure increases the earning capacity or reduces the operating
expenses of a business.

According to Kohler the term capital expenditure is “generally restricted to expenditures that add fixed asset
units or that have the effect of increasing the capacity, efficiency, life span, or economy of operation of an
existing fixed asset.”

The following are the examples of capital expenditure :

1. Expenditure incurred for acquisition of fixed tangible assets such as land, building, machinery,
furniture, motor vehicle etc.
2. Expenditure incurred for improvement or extension of fixed assets such as increasing the seating
capacity of a theatre.
3. Expenditure incurred to bring the fixed assets to the place of their use and expenditure incurred on
their installation or erection such as freight on fixed assets, wages paid for installation.
4. Expenditure incurred for the purchase of intangible assets  such as goodwill, patent rights, and
trademarks, copyright, etc.
5. Expenditure incurred for reconditioning of old fixed assets such as expenditure incurred on repairing
or overhealing of secondhand machinery.
6. Major repairs and replacement of plant which increase the efficiency of the plant.
7. The cost of shifting a plant to another place is a capital expenditure [Sultanpur Sugar Works
Ltd. vs. CIT (1963) 49 ITR 160 SC]
 Treatment of Capital Expenditure. Capital expenditure is capitalised. It is written off over the
estimated useful life of the asset. For example, when machinery is purchased, Machinery Account is debited at
the price paid for it and later shown in the Balance Sheet as an asset after deducting depreciation. Similarly,
wages paid for the installation of machinery is capitalised by debiting the Machinery Account.
 Rules for Determining Capital Expenditure. The following are the rules for determining capital
expenditure :

1. An expenditure is capital expenditure, if it is incurred for acquiring a long term asset (having a useful
life of more than one year) for use in the business to earn revenue and not meant for sale.
2. An expenditure is capital expenditure, if it is incurred to put an asset into working condition. For
example, the transportation and installation charges are added to the cost of machine. Similarly, the
legal charges like registration and stamp duty is added to the cost of land and building. Again,
architect fee paid for supervising construction of building is capitalised.
3. An expenditure incurred for putting an old asset into working condition is treated as capital
expenditure and added to the cost of the asset.
4. An expenditure incurred to increase the earning capacity of a business is treated as capital
expenditure. For example, expenditure incurred for shifting the factory to convenient site is a capital
expenditure.
5. Borrowing costs (e., interest and other costs incurred by an enterprise in connection with the
borrowing of funds) that are directly attributable to the acquisition, construction or production of a
qualifying asset should be capitalised as part of the cost of that asset till the asset is ready for its
intended use or sale as per AS-16 : Borrowing costs.

1.1.2 Revenue Expenditure

If an expenditure is made not for the purpose of bringing into existence any capital asset or advantage of
enduring nature but for running the business or working it with a view to produce the profits is revenue
expenditure. Such expenditure benefits the current period only. It is incurred to maintain the existing earning
capacity of the business. For example, the amount spent on purchase of stock-in-trade is of revenue nature.
Administrative expenses and selling and distribution expenses are other examples of revenue expenditure.

 Rules for Determining Revenue Expenditure. The following are the rules for determining revenue
expenditure :

1. An expenditure incurred for the purpose of acquiring goods purchased for resale, consumable items,
etc. is a revenue expenditure. For example, purchase of raw material in the case of manufacturing unit
and purchase of merchandise meant for the purpose of resale. At the end of the year, closing stock and
opening stock of these items adjusted to match cost with revenue for calculating profit.
2. Expenditures incurred on other direct expenses, e., expenses on production and purchase of goods
such as wages, power, freight etc. are revenue expenditure.
3. Expenditure incurred for maintaining fixed assets in working order is revenue expenditure. For
example, amount spent on repairs and renewals is revenue expenditure.
4. Depreciation on fixed assets is revenue expenditure.
5. Expenditures incurred on office and administrative and selling and distribution departments (not
covered above) in the normal course of business are revenue expenditures. These include salaries,
rent, telephone expenses, electricity, postage, advertisement, travelling expenses, commission to
salesmen.
6. Expenditures incurred on non-operating expenses and losses are revenue expenditures. For example,
interest on loan taken after commencement of commercial production, loss on sale of a long term
asset, loss by theft, loss by fire are revenue expenditures.
7. Expenditure incurred by an enterprise to discharge itself from recurring liability is of revenue nature.
For example, a lump sum amount paid to a pensioner by the employer is revenue expenditure.
 8. Expenditure incurred for protecting the business is a revenue expenditure. For example, the amount
spent on propaganda campaign to oppose the threatened nationalisation of industry is of revenue
nature.
9. Expenditure incurred to maintain the existing efficiency or the earning capacity is of revenue type.

 Distinction Between Capital Expenditure and Revenue Expenditure: The following are the points
of distinction between capital expenditure and revenue expenditure :

1. Enduring benefit : Capital expenditure is meant for enduring benefit, e., for more than one accounting
period. Revenue expenditure benefits one accounting period only.
2. Nature of asset : Capital expenditure relates to the acquisition of fixed asset and revenue expenditure
relates to the acquisition of stock-in-trade.
3. Effect on net profit : Capital expenditure is capitalised while revenue expenditure is transferred to the
Trading or Profit and Loss Account. Unexpired portion of the capital expenditure is shown as an asset
in the Balance Sheet. Revenue expenditure is expired cost.
4. Nature of liability discharged : Expenditure incurred by an assessee to free himself from a capital
liability, for instance, disadvantageous lease is a capital expenditure, while the amount spent in
discharging himself from a recurring liability is of revenue nature.
5. Periodicity of occurrence : Capital expenditure is usually of non-recurring nature while revenue
expenditure is usually of recurring nature.
6. Earning capacity : Capital expenditure helps to increase the earning capacity of the business or to
reduce the operating cost. Revenue expenditure is incurred to maintain the existing earning capacity of
the business.
7. Matching : Capital expenditure are not matched against capital receipts. Revenue expenditures are
matched against revenue receipts for income determination.
8. Commencement of business : Capital expenditures may be incurred even before the commencement of
business. Revenue expenditures are incurred only after the commencement of business.

1.1.3 Deferred Revenue Expenditure

Deferred revenue expenditure is a revenue expenditure by nature but it is not treated as revenue expenditure on
the ground that its benefit is not fully exhausted in the accounting period in which it is incurred. The Guidance
Note on ‘Terms used in Financial Statement’, issued by the Institute of Chartered Accountant of India, states
that “Deferred revenue expenditure is that expenditure for which payment has been made or a liability
incurred but which is carried forward on the presumption that it will benefit over a subsequent period or
periods.”

Deferred revenue expenditure is, for the time being, deferred from being charged against revenue. The
unwritten off portion of the deferred revenue expenditure is shown on the asset side of the Balance Sheet. A
portion of the total deferred revenue expenditure is charged as revenue expenditure. Deferred revenue
expenditure should be written off over a certain number of years.


 AS-26 “Intangible Assets” has diluted the concept of deferred revenue expenditure.
According to it, if expenditure is incurred to provide future economic benefits to an enterprise, but no
intangible asset or other asset is acquired that can be recognised, then expenditure should be recognised
when it is incurred. For example, preliminary expenses in establishing a legal entity, expenditure on
training activities and expenditure on relocating or reorganising an enterprise, expenditure on
launching of new products, expenditure on advertising and promotional activities should be recognised
as expenses in the year in which these are incurred. However, share issue expenses and discount on issue
of shares/debentures can be written off over a certain number of years.
 Deferred revenue expenditure should be distinguished from prepaid expenses. In case of deferred revenue
expenditure the benefits available cannot be precisely estimated but in case of prepaid expenses, like payment
of insurance in advance, benefits available can be precisely estimated. In case of prepaid insurance, insurance
protection will be available for a definite period after close of the financial year.

 Distinction between Expenses and Expenditure

 Expenditure : According to the Guidance Note on Terms used in financial statements issued
by ICAI, expenditure is incurring a liability, disbursement of cash or transfer of property for the purpose of
obtaining assets, goods or services. It does not necessarily involve actual delivery or parting with money or
property. Incurring a liability is also expenditure. Expenditure may be capital expenditure, revenue expenditure
or deferred revenue expenditure.
 Expense : According to the Guidance Note on Terms used in financial statements issued by
ICAI, expense is a cost relating to the operations of an accounting period or to the revenue earned during the
period or the benefits of which do not extend beyond that period. Expense is expired cost. It decreases owners
equity, other than those relating to distribution of dividend to shareholders in case of a company or withdrawal
etc. made by the owner (s) in case of non-corporate entities. Expenses give benefit during the accounting
period only in which they are incurred. An expense is incurred when goods or services are used in the process
of earning revenue.

1.2 Capital and Revenue Receipts

The distinction between capital receipt and revenue receipt is important because capital receipt is taken to the
Balance Sheet and revenue receipt is taken to the Trading and Profit and Loss Account.

Capital receipts are the receipts which are not obtained in course of normal business activities of the enterprise.
The examples of capital receipts are :

1.
1. capital contributed by the owner(s),
2. secured or unsecured loans taken,
3. receipts from sale of fixed assets and non-current investments.

In case of not for profit organisation, legacy and life membership are capital receipts.

Revenue receipts are the receipts which are obtained in course of normal business activities. They include
proceeds from sale of goods, fee received from the services rendered in the ordinary course of business,
receipts.

The nature of receipt is decided from the point of view of the person receiving it.

 The following broad principles may be laid down as guide for determining whether a particular
receipt is of capital nature or of revenue nature :

1. A receipt on account of fixed assets is a capital receipt whereas a receipt on account of current assets
or circulating capital is a revenue receipt. For example, sale proceeds from sale of fixed assets is a
capital receipt while proceeds from sale of stock-in-trade is a revenue receipt. Capital profit from sale
of fixed asset is to be shown in Profit and Loss Accounts.
2. A receipt in substitution of source of income  is a capital receipt whereas a receipt in substitution
of income alone is a revenue receipt. For example, compensation for loss of employment or agency is
 a capital receipt (though taxable) whereas damages for breach of business contract is a revenue
receipt.
3. An amount received for surrender of certain right under an agreement is a capital receipt whereas
amount received by way of compensation of loss of future profits is a revenue receipt. For example,
pension is a revenue receipt whereas lump sum received in commutation of pension is a capital receipt
(though taxable).
4. The nature of a receipt is determined exclusively by its character in the hands of the receiver.
5. Where an asset is held as an investment, the sale proceeds of such asset is a capital receipt. But where
an asset is held as stock-in-trade, the sale proceeds of such asset is a revenue receipt. For example,
profit on sale of shares to a dealer in shares is a revenue receipt.

 Distinction between Capital Receipts and Revenue Receipts

1. Capital receipts are not obtained in the course of normal business activities of the enterprise whereas
revenue receipts are obtained in the course of normal business activities.
2. Capital receipts are usually obtained in case of a company from issue of shares, debentures,
borrowings and sale of fixed assets or investments. Revenue receipts are usually obtained from sale of
goods, rendering of services or use of enterprise resources yielding interest, royalties and dividend.
3. Capital receipts are usually of non-recurring nature and revenue receipts are usually of recurring
nature.
4. Capital receipts from financing activities such as issue of shares, debentures and borrowings are
shown on the liabilities side of the balance sheet as these receipts create liabilities payable at a future
date whereas interest on borrowings is shown as a charge in the Profit and Loss Account and
dividends to shareholders are shown as appropriation of profit in the appropriation section of Profit
and Loss Account. Interest accrued/outstanding will also be shown as a liability.