Capital expenditure is different from revenue expenditure explain the statement by giving suitable reasons?

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Answer

Answer

For example, a company buys a machine for the production of biscuits. Whereas the initial purchase and installation costs would be classified as capital expenditure, any subsequent repair and maintenance charges incurred in the future will be classified as revenue expenditure.

Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense.

Answer

Introduction:
Capital expenditure and revenue expenditure are two different types of expenses incurred by a business. While both involve spending money, they serve different purposes and have different implications for the financial statements of a company. In this response, we will explore the differences between capital expenditure and revenue expenditure, highlighting the reasons why they are distinct from each other.

Capital Expenditure:
Definition: Capital expenditure refers to the funds spent by a business on acquiring or improving fixed assets that are expected to generate benefits over a long period of time. These assets can include property, plant, equipment, and vehicles.

Key Points:
- Capital expenditure is a long-term investment made by a company to enhance its productive capacity or improve its efficiency.
- The benefits derived from capital expenditure are usually spread over multiple accounting periods.
- Examples of capital expenditure include the purchase of machinery, construction of a new building, or the acquisition of a vehicle for business use.

Reasons:
1. Long-term benefits: Capital expenditure is characterized by its long-term nature. The assets acquired through capital expenditure are expected to provide benefits to the company for several years, often beyond the current accounting period. These assets contribute to the growth and expansion of the business.

2. Enhancement of productive capacity: Capital expenditure is primarily aimed at increasing the productive capacity of a business. By investing in new machinery or equipment, a company can produce more goods or provide better services, leading to increased revenue and profitability in the long run.

3. Improvement of efficiency: Another reason for capital expenditure is to improve the efficiency and effectiveness of a company's operations. For example, investing in automated machinery can reduce labor costs and increase productivity.

4. Asset creation: Capital expenditure involves the creation or acquisition of new assets that are expected to have a useful life beyond the current accounting period. These assets are recorded on the balance sheet and depreciated over their estimated useful life.

Revenue Expenditure:
Definition: Revenue expenditure refers to the funds spent by a business on its day-to-day operations and maintenance. These expenses are incurred to generate revenue in the current accounting period and are typically recurring in nature.

Key Points:
- Revenue expenditure is a short-term expense that is necessary to keep the business running smoothly on a daily basis.
- The benefits derived from revenue expenditure are usually consumed within the current accounting period.
- Examples of revenue expenditure include rent, utilities, salaries, advertising expenses, and repair costs.

Reasons:
1. Operational expenses: Revenue expenditure is incurred to meet the day-to-day operational needs of a business. These expenses are necessary to keep the business running smoothly and maintain its current level of operations.

2. Immediate benefits: Unlike capital expenditure, revenue expenditure provides immediate benefits to the company. For example, advertising expenses can generate sales and revenue in the current accounting period.

3. Expense recognition principle: Revenue expenditure is recognized as an expense in the income statement for the current accounting period. It is deducted from the company's revenue to determine its net income.

Conclusion:
In conclusion, capital expenditure and revenue expenditure are distinct from each other due to their purposes, time horizons, and effects on the

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