While accounting, accountants often get confused to make the distinction between capital expenditure and revenue expenditure. In this context, it is to be noted that the accounting treatments of capital expenditure and the revenue expenditure are different and due to this reason the accountants must have the idea about the differences between the stated expenditures. Before stating the dissimilarities between these two, we must know the definitions of capital expenditure and the revenue expenditure.









Capital Expenditure:


Expenses for acquiring business assets are considered as capital expenditure. Apart from acquiring assets, expenses for enhancing utility or value of business assets are also recognized as the capital expenditure to a company.


Revenue Expenditure:


Revenue expenditure can be defined as the expenses incurred by a company for its day to day activities. This can be considered as expenditures incurred for generating revenue.


Differences between Capital Expenditure and Revenue Expenditure


































Subject of differences

Capital Expenditure

Revenue Expenditure

Reason of expense

The basic reason behind incurring capital expenditure is to buy fixed assets or enhancing the utility of a fixed asset.  

Revenue expenditure is incurred for generating revenue from business operations for a certain accounting year.  

Effect on the performance of a business

Because of the capital expenditure, the earning capacity of the business increases as this expenditure is incurred for acquiring a new asset or improving the value of existing assets.  

Revenue expenditure is incurred by a company to generate revenue from operation for an accounting period and therefore it can be said that revenue expenditure helps in maintaining the earning capacity of a business.


Tenure of effect

A company can get the benefit for several accounting years out as a result of capital expenditure.


Revenue expenditures are consumed within the year in which it has been incurred.

Nature of the expenditure

Capital expenditure in non-recurring in nature.


Revenue expenditure is generally recurring in nature.


Accounting treatment

Capital expenditure is disclosed through the balance sheet.

Revenue expenditure is disclosed through the income statement.



  


Example and Accounting treatment for capital expenditure and revenue expenditure:


Suppose a company has purchased a building worth Rs. 10,00,000. This expenditure is to be treated as capital expenditure. The journal entry for this expenditure shall be:


Building A/c                                               Dr      Rs. 10,00,000


          To Bank A/c                                                                  Rs. 10,00,000


The acquired building is to be added with the existing building or non-current assets of the company in the balance sheet. Subsequently, bank balance would be reduced by Rs. 10,00,000 for this purchase.





Suppose the company pays rent for Rs. 10,000 per year for a building it has taken on a lease. This expenditure is to be treated as revenue expenditure and the journal entry for this shall be:


Rent A/c                                            Dr      Rs. 10,000


          To Bank A/c                                                                  Rs. 10,000


As this is revenue expenditure, it is required to be matched with the current year revenue by making a closing entry, which is as below:


Profit and Loss A/c                            Dr.     Rs. 10,000


          To Rent A/c                                                                   Rs. 10,000




Thus, Rent is to be treated as a deductible item in the income statement.