What is Capital Expenditure and revenue Expenditure?

Capital Expenditure

Capital expenditure refers to the money a business spends to buy, maintain, or improve the quality of its assets. Capital expenditures are the expenses incurred by an organization for long-term benefits, i.e on the long-term assets which help in improving the efficiency or capacity of the company. These expenses are borne by the company to boost its earning capacity.

The investment done by the companies on assets is capital in nature and through capital expenditure, the company may use it for acquiring new assets or may use it in the maintenance of previous ones. These expenditures are added to the asset side of the balance sheet.

Example: Purchase of machinery, patents, copyrights, installation of equipment, etc.

Revenue Expenditure

Revenue expenditure refers to the routine expenditures incurred by the business to manage day-to-day expenses. They are incurred for a shorter duration and are mostly limited to an accounting year. These expenses are borne by a company to sustain its profitability. These expenditures are shown in the income statement.

These expenditures do not increase the revenue but stay maintained. These expenses are not capitalized.

They are divided into two sub-categories:

1. Expenditures for generating revenue for a business- Those expenditures essential for meeting the operational cost of the business are further classified as operating expenses.
2. Expenditures for maintaining revenue-generating assets- Those expenses incurred by the business for repairing and maintenance of the assets of an organization to keep them in a working state.

Example: Wages, salary, insurance, rent, electricity, taxes, etc.