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Difference between a capital expenditure and a revenue expenditure


Date Posted: 10/5/2012 6:50:59 AM

Posted By: moff J  Membership Level: Silver  Total Points: 485

What comes into your mind when you here the terms capital expenditure and revenue expenditure? How exactly do you treat the purchase of a motor vehicle to be used in a company and the purchase of stocks that will be supplied by that motor vehicle?
This is the basic question that this article attempts to answer even as it delves on what comprises a capital expenditure versus what comprises a revenue expenditure.

A capital expenditure refers to the expending of a company's resources in obtaining long term assets that will provide future economic benefits. When a company purchases a non-current asset like plant and machinery, or even the construction of a building, it is said to have incurred a capital expenditure.
Such expenditures should not be reflected as expenses in the income statement rather they are shown as non-current assets in the balance sheet.

On the other hand a revenue expenditure refers to the incurrence of expenses out of the normal operations of a company. A revenue expenditure is incurred in order to generate revenue. For instance, salaries and wages are revenue expenditures. Revenue expenditures are shown on the income statement and recognized when they are incurred by matching them to their revenue components.

There are also some expenditures on non-current assets which are classified as revenue expenditures rather than being capitalized. For instance, carrying out routine maintenance works on a piece of machinery will be classified as a revenue expenditure.
However, costs incurred when fully servicing and overhauling a machine in order to improve its efficiency and productivity will be classified as capital expenditures.

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