Difference Between Capital Expenditure and Revenue Expenditure

If an institute or organisation needs to spend an amount of money for buying a thing or for investing it in a certain concept, they need to keep track of their funds.

However, the expenses that they have to face also turn out to be profitable, or they suffer losses sometimes.

There are several concepts that encompass the entire idea of the expenses that are managed and completed by a certain organization or institution of any type. Two of these concepts are 1. Capital expenditure and 2. Revenue expenditure.

Capital Expenditure vs Revenue Expenditure

The main difference between capital expenditure and revenue expenditure is their definition. The expenditure that is accepted by an organization or an institution to buy an asset and increase the lifespan of the present asset is known as capital expenditure. On the other hand, the expenses that arise for the maintenance of the present assets are known as revenue expenditure.

Capital Expenditure vs Revenue

Capital expenditure is a type of expense that a company, institution or organisation incurs to buy assets and thereby increase the lifespan of the pre-existing asset.

The assets can be anything depending on the type of company and what business the company is into.

Revenue expenditure is a type of expenditure that a company, institution or organisation incurs to maintain the pre-existing assets. It is also known as operational expenditure or OPEX.

The maintenance of a certain pre-existing asset is considered an expense under the revenue expenditure.

Comparison Table Between Capital Expenditure and Revenue Expenditure

Parameters Of ComparisonCapital Expenditure Revenue Expenditure
Meaning/ DefinitionThe expenditure that is accepted by an organization or an institution to buy an asset and increase the lifespan of the present asset is known as capital expenditure.The expenses that arise for the maintenance of the present assets are known as revenue expenditure.
DurationLong Short
Asset valueThe value of an asset is increased.The value of an asset is not increased.
Capitalization AvailableUnavailable
Business revenueThe business revenue stays unaffected.The business revenue is reduced.

What is Capital Expenditure?

Capital expenditure is a form of expenditure that is accepted by several companies, businesses, institutions, organisations for buying a new asset altogether, which thereby increases the lifespan of the pre-existing asset.

It is also addressed as a capital expense or CAPEX. Many fixed assets are bought for a company’s necessity which is all a part of capital expenditure.

If a company is any sort of a plant, it would require many more fixed assets. Other than that, the expenses for the building of property is also considered a capital expense.

Several companies also require equipment and raw materials for their further production, which is also calculated in the capital expenditure, which is further decided if it is a major or minor financial decision.

Once the decision is made, the expense is completed, and if the expense is considered a major financial decision, then many key people working for the respective company come together and take further actions. Keeping track of the capital expense also helps in taxation.

For various taxation procedures, the expenses under the category of capital expenditures are compulsorily capitalized.

Other than that, a company also takes into consideration the use of the asset and how it would increase the lifespan of a pre-existing asset.

If an asset is bought by a company, it is also bought for various reasons like fixing an asset, replacing a pre-existing asset, preparing an asset for business purposes etc.

What is Revenue Expenditure?

Revenue expenditure is a type of expenditure that is accepted by a company for the maintenance of various other existing assets.

It fixes the pre-existing assets from a certain company as the funds are used to maintain the condition of the asset and bring it back to a better condition.

Revenue expenditure is also known as revenue expenses or simply as an operational expense or OPEX. There are two main types of revenue expenses, indirect revenue expenditure and direct revenue expenditure.

The process of the various goods and services that are engaged in a company’s entire manufacturing and the costs and expenses that are incurred during that time falls under the category of direct expenditure.

The various costs and expenses that are incurred during the distribution of various goods and services fall under the category of indirect expenditure.

The direct expense is the expense that occurs when the process is ongoing, while the indirect expense is an expense that occurs when the process is finished.

There are various examples of revenue expenditure. If a company buys equipment for carrying out various tasks and the monthly maintenance cost that equipment is supposed to be paid, then that cost comes under the revenue expenditure section.

All the monthly entries and transactions that are made for that particular equipment are a part of revenue expenditure.

Main Differences Between Capital Expenditure and Revenue Expenditure

  1. Capital expenditure includes the expenses that are occurred for buying new assets. On the other hand, revenue expenditure includes the expenses that are occurred for maintaining the pre-existing assets.
  2. The business revenue stays unaffected by the capital expenditure. On the other hand, the business revenue is curtailed because of revenue expenditure.
  3. Capital expenditure is also known as CAPEX. On the other hand, revenue expenditure is also known as OPEX.
  4. A business can gain long-term profits because of capital expenditure. On the other hand, a business can gain short-term profits because of revenue expenditure.
  5. Capital expenditure is non-recurring. On the other hand, revenue expenses are recurring.
  6. Capitalization is available in capital expenditure. On the other hand, capitalisation is not available in revenue expenditure.
  7. Some part of the capital expense appears either in the income statement or in the balance sheet. On the other hand, the entire revenue expense all ears in the income statement.
Difference Between Capital Expenditure and Revenue

Conclusion

Both capital expenditures and revenue expenditures are equally crucial for growing a certain business. They can help gain maximum profit, and many issues regarding finances and expenses can be resolved because of these concepts.

The amount of money that is spent on various materials is a thing that needs to be monitored and kept track of constantly so that a company does not spend more or less. That is when both these concepts are most useful.

References

  1. https://www.tandfonline.com/doi/pdf/10.1080/00137917508965140
  2. https://www.sciencedirect.com/science/article/pii/S0161893810000475
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