P2-Explain the difference between capital and revenue items of expenditure and income
In business, it is very common to spend money in order to make profit. A large amount of expenditure is incurred by the company for various purposes to get high returns. The expenditure has been broadly divided into two categories – Capital and Revenue. Prima facie, these two terms seem alike, but they are not similar.Capital Expenditure is an expense generally made to acquire an asset or improve the capacity of the asset. Unlike Revenue Expenditure, which is an expense made for operating day-today activities of the business. The difference between Capital and Revenue is explained here. Capital Expenditure Vs Revenue Expenditure
1. Comparison Chart
2. Definition …show more content…
As a huge amount is spent on it, the expenditure is capitalized, i.e. the amount of expenditure is spread over the remaining useful life of the asset.
In a nutshell, the expenditure which is done for initiate current as well as future economic benefit, is capital expenditure. It is like a long term investment done by the entity, in the name of assets, to create financial gain for the years to come. For example – Purchase of Machinery or installation of an equipment to the machinery which will improve its productivity capacity or life years.
Definition of Revenue Expenditure
The expenditure which is incurred on a regular basis for conducting the operational activities of the business are known as Revenue expenditure like purchase of stock, carriage, freight etc.. As per the accrual accounting assumption, the recognition of revenues is done when they are earned, while expenditure are recognized when they are incurred. Therefore the revenue expenditure is charged in the Income Statement as and when they occur. This satisfies the basic principle of Accounting i.e. Matching Principle in which the expenses are recorded in the period of their …show more content…
Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only.
2. The major difference between the two is that, the Capital expenditure is a one time investment of money. On the contrary, revenue expenditure occurs frequently.
3. Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income Statement (depreciation), but Revenue Expenditure is shown only in the Income Statement.
4. Capital Expenditure is capitalized as opposed to Revenue Expenditure which is not capitalized.
5. Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure is a short term expenditure.
Example
If a company deals in computers and opens a new branch at different location for which it acquires a building. The acquisition of the building will be a capital expenditure, while the purchase of computers will be a revenue expenditure. If a company is involved in property dealing business the purchase of the buildings will be a revenue expenditure, while the purchase of computers would be a capital expenditure.
In business, it is very common to spend money in order to make profit. A large amount of expenditure is incurred by the company for various purposes to get high returns. The expenditure has been broadly divided into two categories – Capital and Revenue. Prima facie, these two terms seem alike, but they are not similar.Capital Expenditure is an expense generally made to acquire an asset or improve the capacity of the asset. Unlike Revenue Expenditure, which is an expense made for operating day-today activities of the business. The difference between Capital and Revenue is explained here. Capital Expenditure Vs Revenue Expenditure
1. Comparison Chart
2. Definition …show more content…
As a huge amount is spent on it, the expenditure is capitalized, i.e. the amount of expenditure is spread over the remaining useful life of the asset.
In a nutshell, the expenditure which is done for initiate current as well as future economic benefit, is capital expenditure. It is like a long term investment done by the entity, in the name of assets, to create financial gain for the years to come. For example – Purchase of Machinery or installation of an equipment to the machinery which will improve its productivity capacity or life years.
Definition of Revenue Expenditure
The expenditure which is incurred on a regular basis for conducting the operational activities of the business are known as Revenue expenditure like purchase of stock, carriage, freight etc.. As per the accrual accounting assumption, the recognition of revenues is done when they are earned, while expenditure are recognized when they are incurred. Therefore the revenue expenditure is charged in the Income Statement as and when they occur. This satisfies the basic principle of Accounting i.e. Matching Principle in which the expenses are recorded in the period of their …show more content…
Capital expenditure generates future economic benefits, but the Revenue expenditure generates benefit for the current year only.
2. The major difference between the two is that, the Capital expenditure is a one time investment of money. On the contrary, revenue expenditure occurs frequently.
3. Capital expenditure is shown in the Balance Sheet, in asset side, and in the Income Statement (depreciation), but Revenue Expenditure is shown only in the Income Statement.
4. Capital Expenditure is capitalized as opposed to Revenue Expenditure which is not capitalized.
5. Capital Expenditure is a long term expenditure. Conversely, Revenue Expenditure is a short term expenditure.
Example
If a company deals in computers and opens a new branch at different location for which it acquires a building. The acquisition of the building will be a capital expenditure, while the purchase of computers will be a revenue expenditure. If a company is involved in property dealing business the purchase of the buildings will be a revenue expenditure, while the purchase of computers would be a capital expenditure.