Although the day-to-day operations of a successful business don’t always bring up technical accounting terminology, there are some terms you’ll want to be on the lookout for. For example, revenue expenditure and capital expenditure might sound the same, but they are different.
The difference comes down to whether the purchase will be used over the short or long term. In this article, we’ll take a closer look at the expenditure definition for revenue vs capital expenditure, diving further into what separates them.
What is revenue expenditure?
Revenue expenditure refers to the company’s total expenses to produce good service. The total revenue expenditure helps the company prosper by generating revenue within the accounting period. Since these expenses are recorded in the same accounting period as when revenue was generated, they are short-term related expenses.
There are two primary expense types under revenue expenditure: cost of sales and operating expenses (OPEX). Cost of sales refers to expenses a company incurs to obtain the product needed to sell to customers, and operating expenses are the costs associated with doing business.
Revenue expenditure examples
Revenue expenditure focuses strictly on short-term expenses written into the current accounting period.
- Wages paid
- Travel expenses
The actual list is longer than what we’ve noted above, however, it is focused on anything that must be paid for so the business can continue making revenue. Revenue expenses must be budgeted so the business doesn’t run into issues.
What is capital expenditure?
Generally, capital expenditures focus on more long-term investments made by the company. It refers to funds the company spent to acquire, improve, or maintain physical or intangible assets. Typically, this monetary investment improves capacity or efficiency when generating more revenue.
Expenses incurred under capital expenditure get included on the balance sheet rather than the income statement. Purchased items with a useful life of less than a year aren’t expressed on the balance sheet; therefore, they are not considered capital expenditures.
Capital expenditure is not to be confused with operating expenses which are short-term expenses needed to operate a business. In contrast, capital expenditure is mostly newly purchased assets that have a life of more than a year.
Capital expenditure examples
Capital expenditure helps shed light on how much a company invests in its future. Therefore, these expenses will be included as longer-term assets or investments on the balance sheet. It includes purchases such as:
- Manufacturing equipment
- A building; factory, or facility
Capital expenditure vs. revenue expenditure: What are the differences?
Capital expenditures, or long-term investments, are fixed assets and will continue being productive for a while. Revenue expenditures are related to the cost of goods or repairs and maintenance.
Here are further differences:
The biggest difference between revenue and capital expenditure is how long the purchase will be used. Short-term expenses are considered revenue expenses; they focus solely on keeping the business running and making revenue, such as utilities and rent. Capital expenditures include long-term investments such as purchasing a new facility or vehicle. These expenses are used for a longer time.
This is mostly regarding financial statements. Capital expenditures belong on the balance sheet and get expensed gradually with depreciation; some can last as long as a decade. On the other hand, expense revenues are short-term and expensed fully within the same accounting period.
As long-term assets, capital expenditures involve substantial amounts of money since they have to cross a monetary threshold to classify as capital expenditures. Though it’s possible for a larger expense to become a revenue expenditure, it’s only possible if they are useful for a short time.
Comparison chart: capital expenditure vs. revenue expenditure
|Capital expenditure||Revenue expenditure|
|Involves acquiring or improving permanent assets not meant for resale and may add value to existing assets.||This is a routine expense that takes place during the normal course of business which includes the cost of sales and the maintenance of fixed assets.|
|Increases the earning capacity of the company.||Helps maintain the earning potential of the company but doesn’t focus on increasing revenue.|
|Benefits the company over several years; maybe decades. Only a small part is charged to the income statement as depreciation.||Used within the accounting year and benefits only one year. Because of this, the entire amount is written into the income statement and does not appear on the balance sheet.|
|Balance sheet.||Trading and profit of the income statement.|
Frequently asked questions
The difference between capital and revenue expenditures depends on how long the asset will benefit the company. Revenue expenses help the company continue running – rent, utilities, and regular maintenance included. Capital expenditure comprises long-term investments such as buildings, factories, or vehicles.
Tracking revenue expenditure gives companies a better view of expenses that pay for themselves in the long run. Companies can determine whether some of their expenses are generating immediate income or taking a longer time. This process helps identify unnecessary expenses and find places a company can save funds.
Capital and revenue expenditures are not the same, despite both involving company expenses. The similar meanings of both expenditures cause many to mix them up, failing to see the important differences.
First, capital expenditure involves long-term investments that end up on the balance sheet. The benefit of these investments is spread out over several years, sometimes spanning decades. Revenue expenditures comprise short-term expenses that help a company continue running, including rent, utilities, and maintenance. These benefit the company only for the accounting year in which they’re paid.
Second, sometimes the monetary value is also involved in determining the difference. Larger investments are considered capital expenditures, though they have to belong on the balance sheet. Revenue expenditures are typically smaller in value and belong on the income statement.
To further boost your financial knowledge, check out our mammoth list of +45 bookkeeping resources!
Agata Kaczmarek has held a passion for writing since early childhood. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Master’s Degree in Accounting and Finance.
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