Accounting – 4.1 Capital and revenue expenditure and receipts | e-Consult

Capital expenditure is an expenditure made by a business to acquire or improve a long-term asset. These assets are expected to benefit the business for more than one accounting period. Examples of capital expenditure include:

• Purchase of a new machine
• Building an extension to a factory
• Purchase of a vehicle for deliveries

Revenue expenditure

is an expenditure incurred in the normal running of the business and does not result in the acquisition of a long-term asset. It provides benefit only for the current accounting period. Examples of revenue expenditure include:

• Salaries and wages
• Rent
• Advertising costs
• Cost of goods sold

The distinction between capital and revenue expenditure is important for financial reporting because:

• Accurate Profit Calculation: Capital expenditure is not usually expensed in the period it is incurred. Instead, it is capitalised on the balance sheet and depreciated over its useful life. This means that the full cost of the asset is not recognised as an expense in the current period, leading to a more accurate reflection of profitability.
• Balance Sheet Accuracy: Capital expenditure increases the value of fixed assets on the balance sheet, providing a more accurate picture of the company's assets.
• Tax Implications: Capital allowances are available on capital expenditure, reducing taxable profits.