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Revenue expense are costs in the for day to day running of the business for example servicing

a machine, spare parts etc. Revenue expenditure is normally charged against profit in the

Income statement in the year it is expensed.

Capital expenditure is on an item that will help generate profits over the longer term (12months or more) so a purchase of a machine or van etc. The item is depreciated over the

items useful life and each depreciateable amount is charged to the Income statement in the

year the item has help generate profit

revenue expenditure is the expense incurred for

deriving short term benefits say one year or less

capital expenditure is the expense incurred forderiving long term benefits say more than one year.

Difference between Capital Expenditure

and Revenue Expenditure:

Revenue Expenditure Capital Expenditure

1. Its effect is temporary, i.e. the benefit

is received within the accounting year.

1. Its effect is long-term, i.e. it is not

exhausted within the current accountingyear-its benefit is received for a number of

years in future.

2. Neither an asset is acquired nor thevalue of an asset is increased.

2. An asset is acquired or the value of anexisting asset is increased.

3. It has no physical existence because itis incurred on items which are used bythe business.

3. Generally it has physical existence exceptintangible assets.

4. It is recurring and regular and itoccurs repeatedly.

4. It does not occur again and again. It isnonrecurring and irregular.

5. This expenditure helps to maintain the

business.

5. This expenditure improves the position of

the business.6. The whole amount of this expenditure

is shown in trading P & L A/c orincome statement.

6. A portion of this expenditure (depreciationon assets) is shown in trading & P & L A/cand the balance is shown in the balancesheet on asset side.

7. It does not appear in the balancesheet.

7. It appears in the balance sheet until itsbenefit is fully exhausted.

8. It reduces revenue (profit) of thebusiness.

8. It does not reduce the revenue of theconcern. Purchase of fixed asset does notaffect revenue.

Example:

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State with reasons whether the fallowing items of expenditure are capital or revenue.

(i) Wages paid on the purchase of goods.

(ii) Carriage paid on goods purchased.

(iii) Transportation paid on machinery purchased.

(iv) Octroi duty paid on machinery.

(v) Octroi duty paid on goods.

Solution:

Sr.

No.Nature of

ExpenditureReasons

Wages A/C isdebited. (i)

Revenueexpenditure

Wages paid on goods purchased and arevenue expenditure because goodspurchased are meant for resale. It isrecurring by nature as goods are purchased

repeatedly in a business.

Carriage A/c isdebited.

(ii) Revenueexpenditure.

The carriage paid on purchases is a revenueexpenditure because goods purchased aremeant for resale and whenever goods arepurchased carriage is paid to bring the goods

to the godown of the business.

Machinery A/c isdebited instead

of transportationA/c.

(iii) Capitalexpenditure.

A machinery purchased is useless until it isbrought to the business. As machinery is a

fixed asset and transportation paid is anadditional cost to the machinery, so it is acapital expenditure.

Machinery A/c isdebited instead

of octroi duty A/c

(iv) Capitalexpenditure.

Octroi duty paid on machinery is also anadditional cost to the machinery, If it is not

paid, the machinery cannot be taken to thebusiness, so it is a capital expenditure.

Octroi duty A/c isdebited.

(v) Revenueexpenditure.

Octroi duty paid on goods is a revenueexpenditure because goods mean saleablegoods. It is recurring and is paid repeatedlywhenever goods are purchased.

revenue Exp., means one transaction which can benefit

and that tran..repeats in one a/cing year.

Ex: printing & Stationery , Salaries Etc.,

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capital Exp., which transaction benefit the more than

one accounting year

Ex; Plant7Machinery , Buildings etc.,

Expenditure refers to the outlay of cash from the company to the outsiders. Here is the list of

differences between revenue and capital expenditure

1. Revenue expenditures refers to those expense which are incurred for maintain the assets

and sales of the products of the company while capital expenditures refers to those expense

which are incurred to buy the assets.

2. While revenue expenditures are incurred daily, in other words it is of recurring nature

while capital expenditures are incurred once in a while and therefore it is of non recurringnature.

3. While revenue expenditures is recorded in the profit and loss account of the company

whereas capital expenditures are recorded in the balance sheet of the company.