Distinction between capital and revenue expenditure

Distinction between capital and revenue expenditure

1. Distinction between Capital and revenue expenditure Presented by: Sanjana.S MBA 2 nd Batch 2020

2. Expenditure

3. Capital Expenditure It is also known as CAPEX or capital expenses Expenditures which results in acquisition of a long term asset asset or which results in an increase in the earning capacity of business. Incurred during the acquisition of long term assets suck as property, plot, equipment or an infrastructure, computers, vehicles or that have a useful life of more than one accounting period. An expenditure whose benefit lasts for a longer period of time. It is taken to the asset side of the balance sheet and is also stated in the firm’s cash flow statement. Example: Let’s say Company Y deals with iron sheet manufacturing. Due to the increase in demand for its high profiled iron sheets, the company executives decide to buy a new minting machine to revamp production. They estimate the new machine will be able to improve production by 35%, thus closing the gap in the demanding market. Company Y decides to acquire the equipment at the cost of $100 million. The useful life of the machine is expected to be 10 years

4. Revenue Expenditure. It is also known as Operating expenses or OPEX It is incurred for the day to day operations and maintaining the earning capacity of existing assets. These are the cost incurred to keep the operations going on such as  wages, rent, power, bad debts, depreciation, telephone, printing, cost of goods (to be sold), freight, maintenance of fixed assets, etc. The benefits of the revenue expenditure is exhausted within one year. revenue expenditure for an accounting period is stated in a firm’s Income Statement. However, the same is not reported in the firm’s Balance Sheet . Revenue Expenditure are of two types   1. Direct expenses 2. Indirect expenses Example: After the purchase of the minting machine, the company may decide to hire a new lead engineer together with seven other technicians to run the new machine. A fundamental role of this team will be keeping the equipment running throughout the production cycle. Other secondary tasks may include installation of new parts, monitoring production, and continuous maintenance. The hiring of the engineer and technicians is considered a revenue expenditure.

5. All expenses are shown on the debit side of the below Trading and Profit & Loss account are revenue in nature.

6. Distinction Between Capital expenditure and Revenue expenditure. Parameters Capital Expenditure Revenue Expenditure Definition Capital expenditure is the money spent by a firm to acquire assets or to improve the quality of existing ones Revenue expenditure is the money spent by business entities to maintain their everyday operations. Time span Capital expenses are incurred for the long-term. Revenue expenses are incurred for a shorter-duration and are mostly limited to an accounting year. Treatment in accounting books CAPEX is stated in a firm’s Cash Flow Statement. It also appears in the Balance Sheet of a company under fixed assets. OPEX is stated in a firm’s Income Statement but is not necessarily reported in its Balance Sheet. Purpose Such expenses are borne by a company to boost its earning capacity Such expenses are borne by a company to sustain its profitability

7. Yield The yield of these expenses is not limited to a year and is usually long-term in nature. The yield of these expenses is mostly limited to the current accounting period. Occurrence Typically, CAPEX is not quite recurrent OPEX makes up recurrent expenses. Capitalisation of expenses Capital expenses are capitalised. Revenue expenses are not capitalised. Treatment of depreciation Depreciation of assets is charged on capital expenses. Depreciation of assets is not levied on revenue expenditure. Examples Purchase of Machinery or patent, copyright, installation of equipment and fixture, etc. Wages, salary, utility bills printing and stationery, inventory, postage, insurance, taxes and maintenance cost, among others.

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