Capital expenditure and Revenue expenditure

Capital Expenditure:

An expenditure which results in the acquisition of permanent asset which is intended lo be permanently used in the business for the purpose of earning revenue, is known as capital expenditure. These expenditures are 'non-recurring' by nature. Assets acquired by incurring these expenditures are utilized by the business for a long time and thereby they earn revenue. For example, money spent on the purchase of building, machinery, furniture etc. Take the case of machinery-machinery is permanently used for, producing goods and profit is earned by selling those goods. This is not an expenditure for one accounting period, machinery has long life and its benefit will be enjoyed over a long period of time. By long period of time we mean a period exceeding one accounting period.

Moreover, any expenditure which is incurred for the purpose of increasing profit earning capacity or reducing cost of production is a capital expenditure. Sometimes the expenditure even not resulting in the increase of profit earning capacity but acquires an asset comparatively permanent in nature will also be a capital expenditure.

It should be remembered that when an asset is purchased, all amounts spent up to the point till the asset is ready for use should be treated as capital expenditure. Examples are: (a): A machinery was purchased for $50,000 from Karachi. We paid carriage $1,000, octroi duty $500 to bring the machinery from Karachi to Lahore. Then we paid wages $1,000 for its installation in the factory. For all these expenditures, we should debit machinery account instead of debiting carriage A/c, octroi A/c and wages A/c. (b): Fees paid to a lawyer for drawing up the purchase deed of land, (c): Overhaul expenses of second-hand machinery etc. (d): Interest paid on loans raised to acquire a fixed asset etc.

Example:

1. Purchase of furniture, motor vehicles, electric motors, office equipment, loose tools and other tangible assets.
2. Cost of acquiring intangible assets like goodwill, patents, copy rights, trade marks, patterns and designs etc.
3. Addition or extension of assets.
4. Money spent on installation and erection of plant and machinery and other fixed assets.
5. Wages paid for the construction of building.
6. Structural improvements or alterations in fixed assets resulting in an increase in their useful life or profit earning capacity.
7. Cost of issue of shares and debentures (certain expenditures are incurred by the companies when share and debentures are issued).
8. Legal expenses on raising loans for the purchase of fixed assets.
9. Interest on loan and capital during the construction period.
10. Expenditures incurred for the development of mines and plantations etc.
11. Money spent to bring a second-hand asset into working condition.
12. Cost of replacing factory building from an old place to a new arid better site.
13. Premium given for a lease.

Revenue Expenditure:All the expenditures which are incurred in the day to day conduct and administration of a business and the effect-of which is completely exhausted within the current accounting year are known as"revenue expenditures". These expenditures are recurring by nature i.e. which are incurred for meeting day today requirements of a business and the effect of these expenditures is always short-lived i.e. the benefit thereof is enjoyed by the business within the current accounting year. These expenditures are also known as "expenses or expired costs." e.g. Purchase of goods, salaries paid, postage, rent, traveling expenses, stationery purchased, wages paid on goods purchased etc. 

This expenditure is incurred on items or services which are useful to the business but are used up in less than one year and, therefore, only temporarily increase the profit-making capacity of the business.

Revenue expenditure also includes the expenditure incurred for the purchase of raw material and stores required for manufacturing sale able goods and the expenditure incurred to maintain the- fixed assets in proper working conditions i.e. repair of machinery, building, furniture etc.

Following are the examples of revenue expenditure.

1. Wages paid to factory workers.
2. Oil to lubricate machines.
3. Power required to run machine or motor.
4. Expenditure incurred in the ordinary conduct and administration of business, i.e. rent, , carriage on sale able goods, salaries, wages manufacturing expenses, commission, legal expenses, insurance, advertisement, free samples, postage, printing charges etc.
5. Repair and maintenance expenses incurred on fixed assets.
6. Cost of saleable goods.
7. Depreciation of fixed assets used in the business.
8. Interest on borrowed money.
9. Freight, cartage, octroi duty, transportation, insurance paid on saleable goods.
10. Petrol consumed in motor vehicles.
11. Service charges to motor vehicles.
12. Bad debts.

Difference between Capital expenditure and Revenue expenditure:

Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense. Thus, the differences between these two types of expenditures are as follows:

• Timing. Capital expenditures are charged to expense gradually via depreciation, and over a long period of time. Revenue expenditures are charged to expense in the current period, or shortly thereafter.
• Consumption. A capital expenditure is assumed to be consumed over the useful life of the related fixed asset. A revenue expenditure is assumed to be consumed within a very short period of time.
• Size. A more questionable difference is that capital expenditures tend to involve larger monetary amounts than revenue expenditures. This is because an expenditure is only classified as a capital expenditure if it exceeds a certain threshold value; if not, it is automatically designated as a revenue expenditure. However, certain quite large expenditures can still be classified as revenue expenditures, as long they are directly associated with sale transactions or are period costs.