Capital and Revenue Expenditures
Capital and Revenue Expenditures
Edwin Bivens
XACC- 291
06/08/2014
Capital and Revenue Expenditures: The Differences and Similarities.
In order to be able to explain the differences between Capital Expenditure and Revenue Expenditure; I believe it is important to understand what each are:
A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost will then be charged to depreciation expense over the useful life of the asset. Capital expenditure is also considered an expenditure on a non-current asset. This is done either in acquiring them or increasing their earning capacity (Victor, 2010) .
Revenue expenditure is that which is used for the purpose of trade or merely to maintain the earning capacity of non-current assets (Victor, 2010). They are matched with revenues of the current accounting period. Regular repairs are revenue expenditures because they are charged directly to accounts such as Repairs and Maintenance Expense. It doesn’t matter if the repair improves the asset or not, it is still considered a revenue expenditure.
The main difference between Capital expenditure and Revenue is the overall impact on the business’ Financial Reports:
The Capital expense only effects the depreciation expense of the period indirectly. This is because the depreciation expense for the non-current asset would appear in the income statement for the period, while the accumulated depreciation figure offsets the historical cost of the asset. This results in an increase in the business asset.
Revenue is normally used fully within the period. Sometimes if there are funds remaining they are left over for the next period.
It is important to understand how to classify rather the expenditure is capital or revenue. This is because the long term accountability in the financial statement will be
Edwin Bivens
XACC- 291
06/08/2014
Capital and Revenue Expenditures: The Differences and Similarities.
In order to be able to explain the differences between Capital Expenditure and Revenue Expenditure; I believe it is important to understand what each are:
A capital expenditure is an amount spent to acquire or improve a long-term asset such as equipment or buildings. Usually the cost is recorded in an account classified as Property, Plant and Equipment. The cost will then be charged to depreciation expense over the useful life of the asset. Capital expenditure is also considered an expenditure on a non-current asset. This is done either in acquiring them or increasing their earning capacity (Victor, 2010) .
Revenue expenditure is that which is used for the purpose of trade or merely to maintain the earning capacity of non-current assets (Victor, 2010). They are matched with revenues of the current accounting period. Regular repairs are revenue expenditures because they are charged directly to accounts such as Repairs and Maintenance Expense. It doesn’t matter if the repair improves the asset or not, it is still considered a revenue expenditure.
The main difference between Capital expenditure and Revenue is the overall impact on the business’ Financial Reports:
The Capital expense only effects the depreciation expense of the period indirectly. This is because the depreciation expense for the non-current asset would appear in the income statement for the period, while the accumulated depreciation figure offsets the historical cost of the asset. This results in an increase in the business asset.
Revenue is normally used fully within the period. Sometimes if there are funds remaining they are left over for the next period.
It is important to understand how to classify rather the expenditure is capital or revenue. This is because the long term accountability in the financial statement will be
References: Victor, D. (2010, February 12). Capital Expenditure and Revenue Expenditure. Retrieved from Inside Business 360: http://www.insidebusiness360.com/index.php/capital-expenditure-and-revenue-expenditure-2-14342/