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Classifying capital and revenue expenditures can be a difficult task. These expenditures directly affect in creating an accurate balance sheet and thus, you need to know how to classify them in the correct manner.
Examples of capital expenditure include the purchase of an asset or any repairs done to the asset in order to increase its life and productivity.
Examples of revenue expenditure include wages and salary, printing and stationery, electricity, repairs and maintenance, inventory, postage, insurance, taxes, etc.
To help you understand capital and revenue expenditure, here are a few points that distinguish the two expenses.
Capital expenditure is any amount spent by a company on an asset which provides long-term benefits (usually for more than 12 months). Capital expenditures are generally listed as assets in the balance sheet.
Revenue Expenditure is an expense which is incurred in the current accounting year and the benefits of that expense are also enjoyed during the same time period. Therefore, revenue expenditure is applicable only for the current accounting period. Revenue expenditures are listed as expenses on the debit side of profit and loss account.
Capital expenditure is non-recurring (expenses incurred once in a few years) in nature. This means the benefits to your organization is for a longer period of time.
Revenue expenditure is recurring in nature which means you need to spend on a periodic basis to derive any benefits from it. The company is not benefitted by revenue expenditures beyond the current accounting period. For maintaining the existing productivity, a company has to incur revenue expenditures. For example, electricity bill paid for the current year cannot be benefited from in the next year. Revenue expenditure seeks to maintain the current earning capacity of the company.
Capital expenditure includes purchasing of fixed assets such as land and building, plant and machinery, etc. The benefits of these are enjoyed by a period of years. Buying a new motor vehicle is a capital expenditure because the vehicle will be used over a period of years depending on its usage. Capital expenditure seeks to improve earning capacity of the company in the future.
The benefits of revenue expenditure are enjoyed for a short time (less than 12 months).
Capital expenditure involves huge costs as the value of assets and investments are large amounts. Revenue expenditure is rent paid, wages and salaries etc. Hence, there is less money spent as compared to capital expenditures. A transaction is only classified as capital expenditure if it crosses a certain limit. It differs from organization to organization to classify what expense will be capital or revenue.
However, certain expenses are termed as deferred revenue expenditures. A deferred revenue expenditure is a kind of expenditure which is revenue in nature but its benefits last for a number of accounting periods. Examples of deferred revenue expenses are the discount on issue of shares, research and development expenses, heavy advertising expenses for promotion of a new product, etc.
You can charge depreciation amount based on capital expenditures as per your company policies. Depreciation for capital expenditures is charged over a long period of time. There is no depreciation charged to revenue expenditure since these expenses are charged in the current period or shortly thereafter. Hence, it is important to know what to classify as capital and revenue expenditure to get a true and fair view of your expenses.
These are just a few differences between capital and revenue expenditure. If you have any difficulty in classifying capital and revenue expenditure or need any help with respect to maintaining your accounts, it is recommended to consult a professional accounting firm.