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

The purchase of office stationery and the payment of monthly rent are classified as revenue expenditure because they are costs incurred in the normal running of the business. They provide benefit only for the current accounting period and do not result in the acquisition of a long-term asset. These are day-to-day expenses necessary to maintain the business's operations.

The accounting treatment of a new computer purchased for use in a business differs significantly. The computer should be treated as capital expenditure. This is because a computer is a long-term asset that will benefit the business for more than one accounting period. It will be recorded on the balance sheet as a fixed asset and depreciated over its useful life. The cost of the computer will not be fully expensed in the current accounting period; instead, it will be spread over several years through depreciation.

Key Difference: The key difference is that revenue expenditure is expensed in the period it is incurred, while capital expenditure is capitalised and depreciated over its useful life. This difference impacts the profit reported in the income statement and the assets reported on the balance sheet.