Capital and Revenue expenses Capital expenditure occurs when a business spends money in purchasing non-current assets for the business operations or when it spends money in adding value or improving an existing non-current asset. This will include delivery and legal costs in acquiring the non-current assets.
Non-current assets are items owned by the business which have some longevity and will be used for a long period of time within the business. These are commonly known as fixed assets. Examples of these include buildings, machinery, furniture, motor vehicles etc.
When a business buys a new machine, this is classified as a capital expenditure and is accounted for in the statement of financial position over a few years, because of the longevity of the use of the machinery in the business.
Revenue expenditure are all other expenditure outside capital expenditure incurred by a business in carrying out its daily operations. Such expenditure will include costs incurred in the acquisition of current assets acquired for conversion into cash; costs incurred in purchasing and selling of goods; day-to-day administration or operating costs; and costs incurred in maintaining the revenue-earning capacity of the non-current assets.
All such expenditure is charged to the statement of profit or loss, because such expenditure are usually used up within a short period of time and don't add value to any existing non-current assets.
The differences between capital and revenue expenditure can be illustrated using a motor vehicle:
Expenditure Type of expenditure
Cost of the motor vehicle Capital
Petrol for the vehicle Revenue
Repairs to the vehicle Revenue
Headlights for the vehicle Capital
Servicing the vehicle Revenue
Body work & spraying the vehicle Capital
Foot mats for the vehicle Revenue
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