What is Capital Expenditure?
Capital Expenditure (CapEx) refers to the funds a business spends to acquire, upgrade, or extend the life of long-term assets. These assets, such as buildings, machinery, or vehicles, provide benefits over multiple accounting periods. CapEx is recorded on the balance sheet and depreciated over time.
What is Revenue Expenditure?
Revenue Expenditure (RevEx) encompasses the costs incurred for the day-to-day operations of a business. These are short-term expenses like rent, utilities, and salaries, which are fully consumed within the current accounting period. RevEx is recorded on the income statement and is fully tax-deductible in the year it occurs.
Key Differences Between Capital and Revenue Expenditure
| Aspect | Capital Expenditure (CapEx) | Revenue Expenditure (RevEx) |
|---|---|---|
| Purpose | Acquire or enhance long-term assets | Maintain daily business operations |
| Benefit Duration | Long-term (over multiple years) | Short-term (within the current year) |
| Accounting Treatment | Capitalized and depreciated over time | Expensed in the current period |
| Financial Statement | Appears on the balance sheet | Appears on the income statement |
| Examples | Purchasing machinery, constructing buildings | Paying salaries, utility bills, routine maintenance |
Examples
Capital Expenditure:
- Buying a new delivery truck for a logistics company.
- Constructing a new warehouse to increase storage capacity.
- Upgrading computer systems to improve operational efficiency.
Revenue Expenditure:
- Paying monthly electricity bills for office premises.
- Routine maintenance of existing machinery.
- Purchasing office supplies like stationery.
Understanding the distinction between capital and revenue expenditures is crucial for accurate financial reporting and effective business planning. Proper classification ensures compliance with accounting standards and aids in evaluating a company’s financial health.
