Revenue v. Capital Expenditure in Accounting
From “The Profit and Loss Account in More Detail” in Accounting and Finance for Managers
All expenditure is described as either revenue or capital expenditure. Revenue expenditure refers to expenditure incurred on day-to-day activities such as administration, advertising, raw materials and salaries. […] By contrast, capital expenditure refers to expenditure on longer-term (more than one year) purposes such as investments in plant and machinery and joint ventures.
The distinction is only relevant for calculating profit and make no difference towards cash (as they both have to be spent on or received in the end) (Kind 1999, 28).
In sum, the mutually exclusive distinction is as follows (Kind 1999, 27):
- Revenue expenditure is expenditure on or from short-term (typically day-to-day) activities of the firm or household
- Capital expenditure is expenditure on or from long-term (typically more than a year) purposes
Despite their mutual exclusion for accounting purposes, whether any particular expense or cost item in an account counts under revenue expenditure or capital expenditure can be ambiguous (Kind 1999, 28).
That being said, the effects of each type of expenditure on the accounting are not ambiguous: revenue expenditure is “charged straight away in the profit and loss account according to the time period to which it relates,¨ while capital “expenditure is ‘capitalized´ in the balance sheet and depreciated over its estimated commercial life according to the process of depreciation¨ (Ibid).
revenue_expenditure revenue_expenses capital_expenditure capital_expenses accounting mutual_exclusivity depreciation profit_and_loss_account profit_and_loss_statement finance
bibliography
- “The Profit and Loss Account in More Detail.” In Accounting and Finance for Managers, 25–37. The Fast Track MBA Series. Dover, NH: PriceWaterhouseCoopers, 1999.