Distinction between capital and revenue expenditure

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

2. Expenditure
Capital Expenditure
Revenue Expenditure
Deferred Revenue 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

5.  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.

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

7. 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

8. 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.

9. THANK YOU….