What is the difference between capital and revenue expenditure?
Quick Answer
A capital expenditure includes all costs incurred on the acquisition of a fixed asset along with subsequent expenditures that increase the asset's earning capacity, while revenue expenditure only includes costs that are aimed at maintaining fixed assets and not enhancing earning capacity. The distinction between capital expenditure and revenue expenditure is important because only capital expenditures are included in the cost of a fixed asset.
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Full Answer
Capital expenditure includes all costs of acquisition, such as delivery, legal charges, installation, upgrade and replacement costs. Capital expenditure is generally of a one-off expense, and its benefit is derived over several accounting periods. For example, the cost of replacing a conveyor belt on an assembly line is a capital expenditure. For accounting purposes, a capital expenditure requires a debit to the fixed asset account and a credit to accounts payable.
Revenue expenditure includes the costs of maintaining a fixed asset, such as repair, repainting and renewal costs. These costs are incurred on a regular basis, and their benefits are obtained over a relatively short period of time. Since revenue expenditures do not show up in the cost of a fixed asset, they are expensed in the income statement for the period in which they are incurred. Therefore, a revenue expenditure requires a debit to the income statement and a credit to accounts payable.
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