It can be hard to decide whether a particular item of expenditure is of a capital nature or a revenue nature. Some expenses may lie on the borderline, making it complex to determine whether they are capital or revenue expenditures. This difficulty is easily avoided by answering the following questions: If any of these questions are answered in the affirmative, the expenditure is capital; by contrast, if the answers are in the negative, then the expenditure is revenue. It is always possible to distinguish between capital and revenue expenditure in a straightforward way due to the following reasons: 1. Certain expenses are considered items of capital expenditure for one business but items of revenue expenditure for others. For instance, in an engineering firm, plant and machinery may have been purchased to earn profit and others may have been purchased for use in the business. However, in a real estate business, land and buildings purchased are items of revenue expenditure because they may be purchased for resale. 2. Certain expenses may be said to be partly capital and partly revenue expenditure. For example, the combined cost of repairs, alterations, and extensions of a fixed asset. If there is a doubt as to the nature of any item, students should make a note at the foot of their solution as to the method of treatment adopted.
Difference Between Capital and Revenue Expenditures
Difference Between Capital and Revenue Expenditures FAQs
The main difference between capital and revenue expenditures is that the expenses incurred towards revenues are to be treated as deductions from sales. Capital expenditures can be depreciated over their useful lives.
Capital expenditure refers to buying or building new fixed assets or replacing fixed assets. In general, the cost of a fixed asset is capitalized and depreciated over its useful life. Fixed assets are tangible or intangible assets with a useful life of more than one year. Some examples of fixed assets include: - Buildings - Machinery - Vehicles
Revenue expenditures are expenses used to generate revenue. They reduce net income and represent a cost of doing business. Examples include: - Salaries of employees - Utilities, such as water, electricity - Rent paid on office or store space
Some expenditures lie on the borderline between capital and revenue expenditure, making them difficult to categorize. For example, the cost of repairs, alterations, and extensions may be considered as capital expenditure for one entity but as revenue expenditure for another.
Some expenses are always treated as capital expenditures for all types of entities. Some examples include: - Purchase of a building or machinery to be used by the entity and not resale - Installation and erection costs, such as the cost of moving machinery from one site to another or installation costs for new machinery at an existing site
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
