Capital Expenditure vs. Revenue Expenditure

A business organization incurs expenditures for various purposes during its existence. Some of these expenditures are meant to bring in more profits for the organization in the long term, while some are for a short time.

The main reason for incurring expenditure is to increase the efficiency of the business and drive higher returns. Based on the nature of the spending, they are categorized as capital expenditure and revenue expenditure.

Meaning of Capital Expenditure

An organization's expenditures for long-term benefits are known as capital expenditures. These expenditures increase the capacity or capabilities of the long-term asset by either enhancing or adding new assets to the organization.

These expenditures are added to the asset side of the balance sheet. It is done mostly on assets such as land, equipment, furnishings, or vehicles that help to drive benefits for the organisation by increasing the operating capability.

Meaning of Revenue Expenditure

Revenue expenditure is the expenditure incurred by an organisation to manage a business's day-to-day functions, including employee wages, inventory, rent, electricity, insurance, stationery, postage, and taxes.

These are the expenditures that neither help in the creation of assets nor in reducing the liabilities of a business. It is recurring in nature and very essential to maintain the daily operations of a business or an organisation.

Revenue expenditures can be divided into two categories

1. Expenditures for generating revenue for a business: These are the expenditures that are essential for meeting the operational cost of a business, hence these are classified as operating expenses.

2. Expenditures for maintaining revenue-generating assets: Such expenses are incurred by business towards repair and maintenance of the assets of an organisation to keep them in working condition without enhancing their lifespan. Such expenses can be towards repairing and repainting of assets.

Let us look into the key differences between capital expenditure and revenue expenditure to develop a clear understanding of their functions in a business.