Capital expenditures comprise costs incurred for the acquisition of a fixed asset, such as land, a building, a car, machinery, etc.
It also includes any expenditures incurred thereafter that boost the earning capacity of an existing fixed asset. In addition to the cost of purchasing, the cost of acquisition also includes any additional costs incurred to bring the fixed asset to its current location and condition (e.g. delivery costs).
As opposed to revenue expenditures, capital expenditures are typically infrequent (rare) and their benefits accrue across multiple accounting periods. The following are examples of Capital Expenditures:
- Purchase costs (less any discount received) of an asset
- Delivery costs
- Installation costs
- Legal charges
- Upgradation costs
- Replacement costs
Revenue expenditures are expenses incurred for which the whole benefit is realised in a single accounting period. These are the routine expenses incurred in the normal operation of the firm. These expenditures are charged against the Trading and Profit & loss Account.
In other words, the expenses incurred on a regular basis to undertake the business’s operational activities, such as the acquisition of inventory, transportation, and freight, are known as revenue expenditures.
Revenue Expenditures do not result in an increase in the business’s earning capacity but rather assist in maintaining the business’s current earning capacity. Examples of revenue expenditures include the cost of items sold, salaries, rent, electricity, and repair and maintenance costs, among others.
Both Capital Expenditures and Revenue Expenditures are necessary for a business to produce a profit in the current year and in future years. Each has its own advantages and disadvantages. In the instance of capital expenditure, a corporation acquires an asset that creates income for future years. In contrast, no tangible asset is bought in the case of a Revenue Expenditure.