Capital Expenditure vs Capital Revenue

The Difference between Capital Expenditure and Capital Revenue

Capital expenditure refers to the funds invested in acquiring or enhancing long-term assets, while capital revenue represents income generated from the sale of capital assets or other sources contributing to the capital of a business.

1. Purpose of Funds

Expenditure – Funds invested in long-term assets or development in the business. These expenses are intended to provide long-term benefits to the company.

Revenue – Funds spent on day-to-day operations of the business, covering routine expenses necessary to keep the business running.

2. Nature of Expense

Expenditure – Typically non-recurring in nature.

Revenue – Generally recurring in nature.

3. Designation

Expenditure – Often referred to as Development Expenditure. These investments are aimed at improving the company's capacity or capabilities.

Revenue – Commonly known as Non-Development Expenditure because it does not involve the development or acquisition of new assets.

4. Accounting Treatment

Expenditure – Capitalized on the balance sheet and depreciated over time. The cost is spread out over its useful life through depreciation, which means the expense is recognized gradually over time to match the asset's value consumption.

Revenue – Recorded as income in the profit and loss statement. It contributes to the company's total income for the period in which it is earned.

5. Financial Statements

Expenditure – Affects the balance sheet by increasing assets and the income statement through depreciation.

Revenue – Impacts on the income statement as a source of income.

6. Examples

Expenditure – Plant & Machinery, Buildings

Revenue – Raw Materials

Conclusion

Understanding the distinction between capital expenditure and capital revenue is essential for effective financial management in any business. Capital expenditure involves investments in long-term assets, which impact the balance sheet and long-term strategic planning.

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