In accountancy, distinguishing between capital expenditure and revenue expenditure is crucial for accurate financial reporting and compliance. These expenditures impact the financial health of a business in different ways and are treated differently on financial statements.
What is Capital Expenditure?
Capital expenditure (CapEx) refers to funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. This type of expenditure is invested in assets that have a useful life extending beyond the taxable year and are used over time.
Examples of Capital Expenditure:
- Purchasing machinery for manufacturing processes.
- Costs associated with constructing a new building.
- Upgrading computer systems with significant enhancements.
What is Revenue Expenditure?
Revenue expenditure (OpEx) covers the costs that are incurred by a business in the framework of its day-to-day operations. These expenses are shorter-term and are deducted in the financial year they are incurred, reflecting immediately in the company’s income statement.
Examples of Revenue Expenditure:
- Wages and salaries paid to employees.
- Rent and utilities for office space.
- Costs of goods sold or raw materials.
Differences Between Capital Expenditure and Revenue Expenditure:
| Basis | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| Nature | Long-term investment in fixed assets. | Short-term expenses for managing daily operations. |
| Benefit Duration | Benefits accrue over several years. | Benefits accrue within the accounting year. |
| Financial Statement | Added to the asset side of the balance sheet. | Charged on the income statement as expenses. |
| Depreciation | Depreciable over the life of the asset (except land). | Not depreciated, treated as an expense in the year incurred. |
| Purpose | Enhances earning capacity or extends asset's life. | Maintains current operating capacity. |
| Tax Treatment | May be capitalized and depreciated over several years. | Deducted fully in the year they are incurred. |
| Examples | Buying a new delivery truck. | Fuel and maintenance for the truck. |
