Quick answer: A capital payment is a one-off cash payment that buys or pays back something with long-term value, such as machinery, land or a long-term loan. A revenue payment is a regular cash payment for running the business day to day, such as salaries, rent, interest and payments to suppliers. Capital payments affect the balance sheet; revenue payments are charged to the profit and loss account.
Every business pays out cash for two very different reasons: to build up the business and to keep it running. Accountants call the first kind capital payments and the second revenue payments. Telling them apart matters, because recording a capital payment as a revenue expense (or the other way round) distorts both profit and the value of assets.
What are capital payments?
Capital payments are non-recurring cash payments made to acquire, improve or pay for long-term assets, or to repay long-term sources of finance. They are the cash side of capital expenditure. The benefit of a capital payment lasts for more than one accounting year.
- They happen occasionally, not every month.
- They usually involve large amounts.
- They create or increase an asset, or reduce a long-term liability.
- They are shown in the balance sheet, not charged in full to the profit and loss account.
What are revenue payments?
Revenue payments are recurring cash payments made to run the business in the current period. They are the cash side of revenue expenditure, and their benefit is used up within the same year.
- They happen regularly, often daily or monthly.
- The amounts are usually smaller per payment.
- They maintain the business but do not add a new long-term asset.
- They are charged to the trading or profit and loss account.
13 examples of capital payments and revenue payments
The table pairs each capital payment with a typical revenue payment so you can see the difference side by side.
| # | Capital payment | Revenue payment |
|---|---|---|
| 1 | Buying machinery or a delivery van | Paying staff salaries |
| 2 | Buying land or a building | Paying wages to workers |
| 3 | Buying furniture and computers | Buying goods for resale in cash |
| 4 | Paying installation charges for a new plant | Paying suppliers (creditors) for goods |
| 5 | Paying for goodwill, patents or trademarks | Paying a bill payable on its due date |
| 6 | Buying long-term investments | Paying interest on a bank loan |
| 7 | Repaying a long-term loan | Paying rent for the shop or office |
| 8 | Redeeming debentures | Paying electricity and phone bills |
| 9 | Redeeming preference shares | Paying insurance premiums |
| 10 | Paying for a major extension that increases capacity | Paying for routine repairs and maintenance |
| 11 | Paying legal fees to acquire a property | Paying advertising expenses |
| 12 | Paying the purchase price of a franchise | Paying GST and other indirect taxes collected |
| 13 | Paying for software that will be used for years | Paying compensation for breach of a supply contract |
How to tell them apart
- Ask how long the benefit lasts. More than one year usually means a capital payment.
- Ask whether it adds capacity. Extending a factory is capital; repainting the same factory is revenue.
- Check how often it recurs. Regular running costs are revenue payments.
- Look at the purpose. Buying an asset to use is capital; buying goods to resell is revenue.
For the receipts side of the same idea, see capital receipts and revenue receipts. Both feed into the final accounts of a business.