Difference between Revenue Expenditure and Capital Expenditure
Revenue Expenditure and Capital Expenditure are two different kinds of budget expenditures. Revenue Expenditure refers to the spending incurred in the day-to-day running of government or business operations. However, Capital Expenditure (CapEx) refers to the spending on acquiring, upgrading, or maintaining physical assets such as property, industrial buildings, or equipment.
What is Revenue Expenditure?
Revenue Expenditure refers to the estimated expenditure of the government in a fiscal year that does not affect the government’s assets and liabilities status. These expenses are incurred to ensure that government departments run efficiently and cover their ongoing costs, e.g. interest payments, pensions, salaries, subsidies, grants, etc.
Features of Revenue Expenditure:
- Nature: These are recurring expenses, meaning they occur regularly within a short period, typically within a fiscal year.
- Purpose: The main objective is to maintain the operational efficiency of the government or business. Examples include salaries, rent, utilities, and maintenance costs.
- Impact on Profit and Loss: Revenue Expenditures are fully charged against the income of the current period, directly affecting the profit and loss statement by reducing net income.
- Tax Treatment: These expenditures are usually deductible for tax purposes in the year they are incurred, helping to reduce taxable income.
- Examples: Salaries and wages; Interest payments on loans; Administrative expenses; Repair and maintenance expenses; and Utilities and office supplies.
What is Capital Expenditure?
The estimated expenditure of the government in a fiscal year which affects the assets and liabilities status of the government is known as Capital Expenditure. It comprises expenditures, such as the acquisition of land, building, machinery, and other equipment; construction of dams and steel plants; investment in shares, loans, and advances by the Central Government to state and union territory governments; public sector undertakings and other entities.
Features of Capital Expenditure:
- Nature: These are non-recurring expenses, meaning they do not happen regularly and usually involve large sums of money.
- Purpose: The primary goal is to enhance the productive capacity or efficiency of the business or to create new assets. Examples include purchasing machinery, buildings, or technology upgrades.
- Impact on Balance Sheet: Capital Expenditures are capitalized, meaning they are added to the asset side of the balance sheet and then depreciated over the useful life of the asset. This spreads the cost over several years.
- Tax Treatment: These expenditures are not fully deductible in the year they are incurred. Instead, they are depreciated over the useful life of the asset, spreading the tax benefit across several years.
- Examples: Purchasing new machinery or equipment; Construction of buildings or infrastructure; Upgrading existing facilities; Acquiring land; and Investment in research and development.
Difference between Revenue Expenditure and Capital Expenditure
| Basis | Revenue Expenditure | Capital Expenditure |
|---|---|---|
| Meaning | The estimated expenditure of the government in a fiscal year that does not affect the assets and liabilities status of the government. | The estimated expenditure of the government in a fiscal year which affects the assets and liabilities status of the government. |
| Appears in | Revenue Expenditure appears in Trading and Profit & Loss Account. | Capital Expenditure appears in Balance Sheet. |
| Nature | Revenue Expenditure is recurring in nature. | Capital Expenditure is non-recurring in nature. |
| Purpose | Revenue Expenditure is made for the normal running of government departments and the provision of various services. | Capital Expenditure is made mainly for the acquisition of assets and for granting loans and advances. |
| Tends to | Revenue Expenditure tends to maintain the earning capacity. | Capital Expenditure tends to increase the earning capacity. |
| Benefits | Revenue Expenditure provides benefits for an accounting year. | Capital Expenditure provides benefits for several years. |
| Example | Pension, Salary, Interest, etc. | Expenditure on acquisition of capital asset, Repayment of Borrowings, etc. |
How to classify an expenditure as Revenue Expenditure or Capital Expenditure?
- If an expenditure either creates an asset or reduces a liability, it is a Capital Expenditure.
- If an expenditure neither creates any asset nor reduces any liability, it is a Revenue Expenditure.
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Example:
Classify the following expenditures as Revenue Expenditure and Capital Expenditure.
1. Repayment of loans.
2. Expenditure on scholarships.
3. Expenditure on collection of taxes.
4. Salary paid to Navy officers.
5. Purchase of Metro coaches from Japan.
6. Amount borrowed from Russia repaid.
7. Expenditure on purchasing tables.
8. Grants given to the State Government.
9. 20% shares purchased by the Government in a Private Ltd.
10. Subsidies.
Answer:
1. It is a Capital Expenditure as it reduces the liability of the government.
2. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.
3. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.
4. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.
5. It is a Capital Expenditure as it increases asset of the government.
6. It is a Capital Expenditure as it reduces the liability of the government.
7. It is a Capital Expenditure as it increases asset of the government.
8. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.
9. It is a Capital Expenditure as it increases asset of the government.
10. It is a Revenue Expenditure as it neither creates any asset nor reduces any liability of the government.
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