We all went to school when we were young and schools charges school fees from students and apart from that students also pay other costs like school bus fee, books related expense, stationary related costs and so on while the first part that is school fees is capital expenditure for an individual because it builds a base for the individual for his or her future education while the second part is revenue expense because it is secondary in nature as it done only to help a student in going to school. In the same way company also do expenditures which are of 2 types one is capital and other is revenue expenditure. In order to understand both the concepts better, let’s look at the difference between capital and revenue expenditure –
- Capital expenditure are those expenses which are done by the company to purchase an asset or increasing the capacity of the asset whereas revenue expenditure refer to those costs which are incurred by the firm in running its day to day operations.
- Capital expenditure involves huge amount and therefore it requires the authority of higher management whereas revenue expenses involves small amount and hence it does not require authority from higher management.
- Capital expenditure is done one or two times in a year whereas revenue expenses are recurring in nature and hence they are done several times during a year.
- Examples of capital expenditure are purchase of machinery, purchase of building, upgrading current machinery and so on while examples of revenue expenditure are rent paid for building, repairs done to machinery, salaries paid to workers and so on.
- Accounting treatment of capital expenditure is complex because a part of it is transferred to profit and loss account in the form of depreciation and remaining balance is shown in the balance sheet whereas accounting treatment of revenue expenditure is simple because it involves transferring of revenue expenses in the profit and loss account of the current year.
- Capital expenditure helps in increasing the earning capacity of the company and hence it helps in making a company big overtime while revenue expense helps in maintaining the earning capacity of the company.