Capital Expenditure and Revenue Expenditure
- Imagine you're running a business.
- You have to make decisions about spending money on:
- Long-term investments, like buying new machinery or building a factory.
- Day-to-day expenses, such as paying salaries or purchasing raw materials.
These two types of spending are called capital expenditure and revenue expenditure.
Capital Expenditure: Investing in the Future
Definition
Capital Expenditure
Capital expenditure refers to spending on non-current assets that a business will use for a long time.
- Capital expenditure refers to spending on non-current assets that a business will use for a long time.
- These assets help the business grow, improve efficiency, or increase production capacity.
Non-current assets are resources that provide value over multiple years, such as buildings, machinery, or vehicles.
ExampleA new restaurant may need finance to buy kitchen equipment, rent a space, hire chefs and wait staff, and promote its grand opening.
Characteristics of Capital Expenditure
- Long-term Use: Assets purchased are used for more than one year.
- High Cost: These investments often require significant financial outlays.
- Strategic Purpose: Aimed at growth, expansion, or improving competitiveness.
Examples of Capital Expenditure
- Purchasing Machinery: A factory buys new equipment to increase production speed.
- Building Facilities: A retail chain constructs a new store to reach more customers.
- Upgrading Technology: A company invests in a new IT system to enhance data security.
Capital expenditure is recorded on the Statement of Financial Position (Balance Sheet) as it reflects the value of non-current assets owned by the business.
Revenue Expenditure: Sustaining Daily Operations
Definition
Revenue Expenditure
Revenue expenditure covers the costs of day-to-day operations.
- Revenue expenditure covers the costs of day-to-day operations.
- These expenses are necessary to keep the business running smoothly but do not result in long-term assets.
Characteristics of Revenue Expenditure
- Short-term Use: Covers items or services that are consumed quickly.
- Recurring Costs: Includes regular expenses like salaries or utilities.
- Immediate Impact on Profits: Directly affects the business's profitability in the short term.
Examples of Revenue Expenditure
- Salaries and Wages: Paying employees for their work.
- Utilities: Covering electricity, water, and heating costs.
