Capital Expenditure vs. Revenue Expenditure
Capital expenditure (CapEx) and revenue expenditure (RevEx) are two fundamental concepts in accounting that differentiate between types of spending.
Definition
- Capital Expenditure: Refers to funds used by an organization to acquire or upgrade physical assets such as property, buildings, or equipment. This type of expenditure is typically long-term and results in the creation of future economic benefits.
- Revenue Expenditure: Involves costs incurred for the day-to-day operations of a business. These expenses are short-term and are aimed at maintaining or restoring the operational efficiency of assets.
Characteristics
- Duration: CapEx has a lasting impact, providing benefits over several years, while RevEx is consumed within the accounting period.
- Impact on Financial Statements: CapEx is capitalized on the balance sheet as an asset, while RevEx is expensed on the income statement, reducing net income.
Examples
- CapEx: Purchasing machinery, constructing a new facility, or upgrading technology.
- RevEx: Salaries, rent, utilities, and routine maintenance costs.
Capital Receipts vs. Revenue Receipts
Understanding the distinction between capital receipts and revenue receipts is vital for financial management.
Definition
- Capital Receipts: These are funds received by an organization that result in a liability or contribute to the equity base. They are typically non-recurring and relate to long-term financing.
- Revenue Receipts: These are regular income inflows that arise from the normal operations of the business, contributing to the revenue generation process.
Characteristics
- Nature: Capital receipts are non-recurring and relate to asset sales or loans, while revenue receipts are recurring and stem from sales, services, or interest income.
- Impact on Financial Statements: Capital receipts do not affect the income statement directly, while revenue receipts contribute to the overall revenue and net income.
Examples
- Capital Receipts: Proceeds from selling an asset, loans taken, or issuing shares.
- Revenue Receipts: Sales revenue, interest earned, or rental income.