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Difference between Capital and Revenue Expenditures

Capital expenditures are those expenditures incurred while acquiring a fixed asset or on the improvements made to an already existing capital asset in order to extend its useful years. Revenue expenditures, on the other hand, are incurred in the regulation and running of the day to day operations of a business.

On timing, revenue expenditures are short-term and supposed to expense in the present period or shortly afterward while capital expenditures are long-term and meant to gradually expense through depreciation in a longer period of time.

Regarding size, capital expenditures involve larger amounts of money as compared to revenue expenditures. Similarly, capital expenditure is capitalized, unlike the revenue expenditure.

When it comes to the consumption purposes, capital expenditures are meant to expand and improve the business ability to generate earnings while the revenue expenditures are meant to maintain the business ability to run and sustain the earning capacity.

The outlay is another distinguishing feature whereby revenue expenditures are perceived to be recurrent expenses, unlike the non-recurrent capital expenditures that only require a one-time investment.

When comparing the benefits realized, capital expenditures generate benefits to the business for more than a year while revenue expenditures are only beneficial in the current accounting year (Avery, 2001).

Why it is necessary to Distinguish between Capital and Revenue Expenditure while Preparing Financial Statements

It is important to understand the distinguishing features to avoid confusion while preparing the financial statements. Despite the fact that they are both expenditures, they are applied differently and affect the financial statements in different ways. Capital expenditures are reflected on the asset side of the Balance Sheet and in the Income Statement as depreciation while revenue expenditures are only shown in the Income Statement as mere expenses. The capital expenditures are not matched with capital receipts while revenue expenditures are matched against the revenue receipts (Avery, 2001).

Avery, H. G. (2001). Capital and Revenue Expenditures. The Accounting Review, 16(3), 274-281.