the distinction between capital expenditure and revenue expenditure

5.1 Business Finance – Working Capital

What is Working Capital?

Working capital is the money a company uses to run its day‑to‑day operations. Think of it as the cash that keeps the business moving – paying suppliers, covering wages, and buying inventory.

Formula (in LaTeX): \$WC = Ac - Lc\$

where \$Ac\$ = current assets and \$Lc\$ = current liabilities.

Capital Expenditure (CapEx) vs Revenue Expenditure (RevEx)

CapEx and RevEx are two types of costs a business incurs. They differ in purpose, duration, and how they appear on the financial statements.

  • Capital Expenditure (CapEx) – Money spent on assets that will benefit the company for many years. 🚗 Analogy: Buying a car.

  • Revenue Expenditure (RevEx) – Money spent on items that are used up within a year. ⛽ Analogy: Buying petrol.

Key differences:

  1. CapEx is recorded as an asset on the balance sheet and depreciated over time.

  2. RevEx is recorded as an expense on the income statement immediately.

  3. CapEx usually involves large, one‑off payments; RevEx is recurring.

Examples of CapEx and RevEx

Expense TypeExampleDuration
CapExPurchase of a new production machine5–10 years
RevExMonthly rent for office space1 year (renewable)
CapExConstruction of a new warehouse15–20 years
RevExUtilities (electricity, water)1 year (renewable)

Exam Tips 📚

Define clearly: Start with a concise definition of CapEx and RevEx.

Use examples: Show at least two examples for each type.

Explain the impact: Mention how each appears on the financial statements.

Analogy helps: A simple analogy (car vs petrol) can make your answer memorable.

Check word limits: Keep answers to the point – A‑Level exams favour clarity over length.