Capital Expenditure vs Revenue Expenditure
1. Definition
Capital Expenditure (CapEx): Costs incurred to acquire, upgrade, or maintain long-term assets. These expenses improve future earnings.
Revenue Expenditure (RevEx): Costs for day-to-day operations, maintaining assets, and generating revenue within the same accounting period.
2. Key Differences
| Feature | Capital Expenditure (CapEx) | Revenue Expenditure (RevEx) |
|---|---|---|
| Purpose | Increases business capacity or enhances assets | Maintains assets or covers operational costs |
| Nature | Non-recurring (one-time or infrequent) | Recurring (happens regularly) |
| Accounting Treatment | Recorded as an asset & depreciated over time | Charged to the income statement |
| Impact on Financial Statements | Affects the balance sheet (increases asset value) | Affects the income statement (reduces profit) |
| Timeframe | Long-term benefit | Short-term benefit |
3. Examples
Capital Expenditure (CapEx) Examples
- Buying land, buildings, or machinery
- Constructing a new factory
- Upgrading IT infrastructure
- Acquiring patents & trademarks
Revenue Expenditure (RevEx) Examples
- Employee salaries & wages
- Rent, utilities, and daily expenses
- Repairs and maintenance of machinery
- Marketing, advertising, and office expenses
4. Mixed Expenditure (Both CapEx & RevEx)
Example 1: Machine Purchase & Repairs
- Capital Expenditure: Buying a machine for ₹10 lakh and installation costs of ₹50,000.
- Revenue Expenditure: Repairs worth ₹20,000 after a few months.
Example 2: Building Renovation
- Capital Expenditure: Buying an old building for ₹5 crore and renovating it for ₹50 lakh.
- Revenue Expenditure: Painting and minor repairs for ₹5 lakh.
Example 3: Business Vehicle
- Capital Expenditure: Buying a delivery van for ₹15 lakh.
- Revenue Expenditure: Monthly fuel and maintenance costs of ₹20,000.
Example 4: Software Purchase
- Capital Expenditure: Purchasing a software license for ₹5 lakh.
- Revenue Expenditure: Paying ₹50,000 per year for software updates.
5. Why This Difference Matters?
- Tax Treatment: Capital expenditure is depreciated over time, while revenue expenditure is deductible in the same year.
- Investment Decisions: CapEx needs long-term planning, while RevEx is essential for daily business.
- Financial Statement Impact: CapEx affects the balance sheet, whereas RevEx impacts the income statement.
6. Conclusion
Understanding the difference between Capital and Revenue Expenditure is crucial for accurate financial reporting and business planning. Some expenditures may include both elements, and correct classification ensures proper accounting and taxation.