To know about the capital expenditures and revenue expenditures, first of all, it is very important to know about the meaning of expenditure beforehand. Expenditure is basically spending of funds or money to avail services or for purchasing. Let’s take a look.
Expenditure means spending on something. This can be a payment is cash or can also be the exchange of some valuable item in exchange for goods or services. It is the process of causing a liability by a commodity. Receipts and invoices keep the records of expenditures. An expense is a word very similar to expenditure but expense shows the deduction in the value of the asset while expenditure simply denotes the obtaining of assets. Two types of expenditures are present on the basis of time durations, That is
- Capital expenditures
- Revenue expenditures
These are expenditures for high-value items that holds longer duration requirements. Capital expenditures are long-term expenditures. In other words, when the expenses are made for a particular asset but they do not get completely consumed in the specific time. Due to this the earning capacity increases, and in the meanwhile, the price of the assets decreases.
Consequently, the future costs are reduced because the costs of the assets are continuously revised according to the depreciation taking place. There is a requirement to redo the capital expenditures in the accounting year. These do not get exhausted in the accounting year and benefits the user in the future years. Besides that, capital expenditures enhance the position of the business and trade.
There different types of capital expenditure, for example
- Cash money spent on business purposes.
- Purchasing of Plants and machinery items
- IT items
- Electric power equipment
- Permanent additions to existing fixed assets
Learn more about Determining Capital or Revenue Nature here
In contrast to the capital expenditure, revenue expenditures are not the high-value items, instead, they are the routine expenditures that takes place in the normal business. In other words, this kind of expenditure maintains fixed assets.
Unlike capital expenditure, earnings do not increase but stay maintained in revenue expenditure. The assets get consumed in an accounting year and no future benefits are available. Also, the prices of assets remain fixed. The assets are consumed in less than a year so there is a need to purchase them again. This is a recurring type of expenditure. There are two sub-categories of revenue expenditures:
- Direct Expenses: These include the cost of manufacturing of raw material to turn it into a finished product. For instance, Productive wages and salaries to workers, shipping costs, legal expenses, electricity, and water bills, fuels costs, rent, commissions, packaging charges.
- Indirect Expenses: These connect with only selling and distributing goods other than manufacturing. For example, salaries, depreciation, machinery, items of furniture and fixing, etc.
Need for Classification
Revenue expenditures and capital expenditures are both completely different things as a one. Revenue expenditure is a periodic investment of money that does not benefit the business nor leads to any loss in any way. While on the other hand, capital expenditure is the long-term investment that only benefits the business.
It is very necessary to determine its capital nature or revenue nature. Because both have their own advantages and shortcoming that are not understandable separately.
Solved Question for You
Q: What do you mean by revenue expenditures and capital expenditures?
Ans: In a nutshell, non-recurring expenditures for high-value items are capital expenditures that have a longer duration requirement. While in contrast, revenue expenditures are the routine recurring expenditures take place in the normal business.
Q: Is production wages revenue or capital expenditure?
Ans: Production wages is a revenue expenditure. It is a recurring expenditure that occurs fairly frequently. Hence we will classify it as revenue expenditure.