For existence purposes, business incurs various expenditures. Some will have long term impact in profit making and some will have short term impact. To increase the business efficiency and get higher returns is the main reason by incurring expenditure.
There are two types of expenditures which are capital expenditures and revenue expenditures respectively.
These are expenditures incurred for long term benefits. The main purpose is to enhance the existing ones or to add a new asset. These are recorded on the asset side (balance sheet). Organizations increase operating capability by spending expenditure on land, equipment, furniture etc.
This expenditure is incurred for the day to day activities of a business. These are very important in maintaining the daily operations and include wages, inventory, stationery etc.
This will not add up the assets or decrease the liabilities of any business. These are categorised into two types namely, expenditure essential for operational cost and expenditures incur towards maintenance and repairs.
The major differences between capital expenditures and revenue expenditures are as follows −
|Sr.No||Capital expenditures||Revenue expenditures|
|1||Amount spent to acquire new assets or upgrading present assets.||Amount spent on day to day operations.|
|2||Time span is long term.||Time span is limited or for the current accounting period only.|
|3||CAPEX recorded in the firm’s cash flow statement.||OPEX is recorded in the firm’s income statement.|
|4||Recorded in the balance sheet under fixed assets.||Not necessary to record in the balance sheet.|
|5||Main purpose is to increase the current capacity.||Main purpose is to sustain its profitability.|
|6||There is no limit for expenses.||These are expenses with limits.|
|7||Generally, these are long term in nature.|
|8||CAPEX is not recurrent||OPEX is recurrent expenses.|
|9||They are capitalised.||These are not capitalised.|
|10||Depreciation of assets is charged.||Depreciation of assets is not charged.|
|11||Examples − purchase of copyrights, machinery etc.||Examples − salary, inventory, taxes etc.|