Capital And Revenue Expenditures

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Distinction Between Capital And Revenue Expenditures

It is important to distinguish between capital expenditures and revenue expenditures because they affect the calculation of income differently. For example, a capital expenditure is allocated to income over a number of years. It provides benefit. If a capital expenditure is treated as a revenue expenditure, i.e., treated as a expenses in the current accounting period, current expenses will be very high and so income will be too low. There will be mismatching between expenses and revenues. On the other hand, It the revenue expenditure is treated as capital expenditure, it will have opposite effect again causing a mismatching between expenditure and income. The distinction between the two may be summed up as:

(1)    Capital expenditure is the amount spent on acquiring a permanent asset while revenue expenditure is incurred for the conduct of the business and maintaining the capital asset in a state of efficiency.

(2)    Capital expenditure adds to the revenue earning capacity of the business. But revenue expenditure does not do so.

(3)    Capital expenditure may add to the value of an existing asset while the revenue expenditure will only decrease the value of net assets.

(4)    Capital expenditure is shown in the balance sheet while the revenue expenditure is transferred to trading or profit and loss account.

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