Quick answer: Capital expenditure buys or improves a long-term asset, such as machinery, buildings or a licence, and benefits the business for more than a year; it goes to the balance sheet and is depreciated. Revenue expenditure covers day-to-day running costs, such as wages, rent, raw materials and routine repairs; it is used up within the year and charged to profit and loss. Costs of bringing an asset into use, like freight and installation, are capital.
| Basis | Capital vs revenue expenditure |
|---|---|
| Benefit | More than one year vs within the year |
| Nature | Non-recurring vs recurring |
| Treatment | Balance sheet and depreciation vs profit and loss |
| Example | New delivery van vs fuel and servicing |
Every rupee a business spends is either capital expenditure, which buys or improves an asset that benefits the business for more than one year, or revenue expenditure, which keeps the business running day to day and is used up within the year. Getting the split right matters because it changes reported profit: capital expenditure goes to the balance sheet and is depreciated over time, while revenue expenditure is charged to profit and loss immediately.
What is Capital Expenditure?
Capital expenditure is spending that creates or improves a long-term asset not meant for resale. It either increases the earning capacity of the business or reduces its running costs over several years.
Examples:
- Buying land, buildings, plant, machinery, vehicles, furniture or computers
- Buying goodwill, patents, trademarks or a licence to operate
- Costs needed to bring an asset into use: freight, installation, legal fees on purchase, and interest during construction
- Improvements that extend an asset’s life or capacity, such as adding a floor to a building
What is Revenue Expenditure?
Revenue expenditure is the regular cost of running the business. Its benefit is used up within the accounting year, so it is charged to the trading or profit and loss account.
Examples:
- Purchase of raw materials and goods for resale
- Wages, salaries, rent, electricity and office expenses
- Selling and distribution expenses such as advertising and delivery
- Routine repairs and maintenance that keep an asset in working order
- Depreciation and interest on loans after the asset is in use
When Revenue-Type Spending Becomes Capital
Some costs that look like everyday expenses are capitalised because they are part of acquiring or creating an asset: freight and cartage on a new machine, wages paid to staff who install it, materials used in building a factory, legal charges on buying property, and development spending in plantation businesses such as tea and rubber before the crop yields.
Capital vs Revenue Expenditure
| Basis | Capital expenditure | Revenue expenditure |
|---|---|---|
| Benefit | More than one year | Within the current year |
| Nature | Non-recurring | Recurring |
| Purpose | Acquire or improve an asset | Maintain the business and its assets |
| Treatment | Balance sheet, then depreciated | Charged to profit and loss |
| Example | New delivery van | Fuel and servicing for the van |
Practice Questions
Q1. A cinema owner pays fees to obtain a licence to run the cinema. Capital or revenue?
Capital expenditure. The cinema cannot operate without the licence, so it is a cost of setting up the business. It is capitalised as an intangible asset and amortised over the licence period. (Annual renewal fees, by contrast, are revenue expenditure.)
Q2. A factory shed is built for ₹10,00,000, and ₹50,000 is spent on temporary huts to store building materials. How are these treated?
Both are capital expenditure. The temporary huts are incidental to building the shed, so their cost is added to the cost of the building, giving a total of ₹10,50,000.
Q3. ₹20,000 is spent repainting an office building that is repainted every few years.
Revenue expenditure. It maintains the building rather than improving it or extending its life.
Q4. ₹15,000 is paid in freight and installation on a new machine costing ₹3,00,000.
Capital expenditure. Costs needed to bring an asset into working condition are part of its cost, so the machine is recorded at ₹3,15,000.
Related reading: deferred revenue expenditure, capital vs revenue payments, capital vs revenue receipts and capital vs revenue profits.