Two bills on Lena's desk: It is Monday morning at Lena's Bakery Ltd, and two bills are waiting. Both are money going out, but they are not the same kind of spending.
| The bill | Cost | What happens to it |
|---|---|---|
| This week's flour from Valley Grain | $9,200 | By Friday it will have been baked, sold and eaten. |
| A second deck oven for the Mill Lane bakehouse | $45,000 | It will still be baking bread in ten years' time. |
That is the whole difference. Spending on something the business will keep and use for more than one year is capital expenditure. What it buys becomes one of the business's non-current assets. The oven is one: the bakery pays once and uses it every night for years.
Capital expenditure at Lena's Bakery
The Mill Lane bakehouse
Setting up the central bakehouse cost $600,000: the building work, the ovens, the mixers. It bakes for all three shops every night and will do so for many years.
A new deck oven
$45,000 for a second oven at Mill Lane. It should keep baking for ten years or more.
The delivery vans
The vans that leave Mill Lane at 5 a.m. carry bread to the shops every morning, year after year.
New tills for the shops
Tills and card readers at High Street, Market Square and Park Road, used every day for several years.
Size is not the test: A $300 bread slicer for the Park Road shop is capital expenditure: it will slice loaves for years. The $9,200 flour bill is not, however large it is: the flour is used up this week.
Ask how long the thing will be used, not how much it cost.
Most capital expenditure buys one of three things: land and buildings (property), machinery and equipment (plant and equipment), or vehicles. Each is bought now and then, not every week, and each helps the business earn money for years to come.
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Now the flour bill. Spending on the day-to-day running of the business, on things used up within the year to earn this year's sales, is revenue expenditure.
The flour's short life
Monday
The flour arrives at the bakery.
Tuesday
It goes into Tuesday's loaves.
Wednesday
The loaves are sold.
Next year
Nothing of it is left to use.
Revenue expenditure comes round again and again: every week, every month, every year.
| Lena's Bakery in 2025 | Revenue expenditure | What it paid for |
|---|---|---|
| Ingredients | $480,000 | Flour from Valley Grain, butter, sugar: everything that goes into the loaves and cakes |
| Wages and salaries | $750,000 | The 22 people who bake, deliver, sell and manage |
| Rent and utilities | $180,000 | Rent on the shops, electricity for the ovens, water |
| Other running costs | $105,000 | Diesel for the vans, insurance, repairs, advertising |
| Total | $1,515,000 | Almost all of the $1,600,000 the bakery took in sales that year |
Where the name comes from: Revenue means sales. Revenue expenditure is what the business spends to earn this year's sales: the flour is bought so the loaves can be sold, and the counter staff are paid so they are sold today.
Next year the bakery has to buy the flour and pay the staff all over again.
| The bakery spends on... | Capital or revenue? | Why |
|---|---|---|
| A new delivery van | Capital | Used every day for years |
| Diesel for the van | Revenue | Burned this week and bought again next week |
| A $900 part to fix a broken oven | Revenue | Keeps an oven the bakery already owns working; nothing new is bought |
| Repainting the High Street shop | Revenue | Maintenance: the shop is kept in good order, not made into something new |
| Building a seating area onto the Park Road shop | Capital | Adds something new that will be used for years |
| This year's insurance for the vans | Revenue | Covers this year only |
Repairs are revenue expenditure: Fixing the oven feels like spending on the oven, and the oven was capital expenditure. But the repair buys nothing new: it keeps what the bakery already owns working. Repairs and maintenance are revenue expenditure.
Spending that adds something new, or makes an asset bigger or better than it was, is capital expenditure.
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Same money, a different story: Lena's Bakery made $85,000 of profit from trading in 2025. Put one bill in the wrong column and that figure tells a different story about the same year.
| Lena's Bakery in 2025 | Amount |
|---|---|
| Sales | $1,600,000 |
| Revenue expenditure | $1,515,000 |
| Profit from trading (before interest and tax) | $85,000 |
Revenue expenditure is counted in full as a cost of this year in the profit and loss account. That is right: the flour was used up earning this year's sales. Capital expenditure is not taken off one year's profit in one go. The oven is recorded on the balance sheet as a non-current asset, because the bakery still owns it and will use it for years.
Put the oven in the wrong column
The right way
Sales $1,600,000, less revenue expenditure $1,515,000: profit from trading $85,000. The $45,000 oven is recorded as something the bakery owns.
The wrong way
Count the $45,000 oven as a cost of this one year and profit from trading falls to $40,000 ($85,000 minus $45,000).
What goes wrong
The bakery looks less than half as profitable as it was. Marco's cousin, the bank that lent $400,000 for Mill Lane and Lena herself would all read a worse year than the one the bakery had, and the list of what it owns would be missing a $45,000 oven.
The other way round
Record the $9,200 flour bill as something the bakery owns and profit looks $9,200 higher than it was, for flour that has already been eaten.
The difference also decides where the money should come from. The Mill Lane bakehouse cost $600,000 and will bake for many years, so $400,000 of it was borrowed from the bank and is being paid back over many years. Flour, wages and electricity come round every week, so they are paid from the money the shops take each day, with some short-term help: Valley Grain lets the bakery pay for its flour a few weeks later, and the $15,000 overdraft covers a slow week.
Capital expenditure
- Buys things kept and used for more than one year
- Mill Lane bakehouse, ovens, vans, tills, a bread slicer
- Spent now and then, not every week
- Recorded on the balance sheet as a non-current asset
- Paid for with long-term money, such as a bank loan repaid over years
Revenue expenditure
- Pays for things used up within the year
- Flour, wages, rent, electricity, diesel, repairs
- Comes round again and again, every week or month
- Counted in full as a cost in this year's profit and loss account
- Paid for from sales, with short-term help such as paying suppliers later
Match the money to the life of the thing: Long-lasting spending, long-term money. Everyday spending, everyday money.
Pay for a $45,000 oven from the overdraft and the bank can ask for its money back long before the oven has earned it.
How this comes up: Capital and revenue expenditure come up as short definitions, as case questions, and as a help for reading longer cases.
Where it comes up
- Define capital expenditure or revenue expenditure, for two marks, or give one example of each.
- Explain the difference between the two for a named business, for four: what each one is, with an example of each from the case.
- Read a longer case. A business that must make large capital expenditure to increase capacity needs long-term finance.
- Replacing staff who retire means revenue expenditure on recruitment and training.
The four-mark pattern
- Say what capital expenditure is. Spending on assets the business keeps and uses for more than one year.
- Give an example from the case. Lena's Bakery's $45,000 deck oven for Mill Lane, which will bake for ten years or more.
- Say what revenue expenditure is. Spending on the day-to-day running of the business, used up within the year to earn this year's sales.
- Give an example from the case. The flour the bakery buys from Valley Grain every week, baked and sold within days.
Two traps: Size is not the test. 'Capital expenditure is a big purchase' is wrong: a $300 slicer used for years is capital, a $9,200 flour bill is revenue.
Repairs are revenue. Fixing or repainting what the business already owns buys nothing new, so it is revenue expenditure, however long the paint lasts.
With reference to Lena's Bakery Ltd, explain the difference between capital expenditure and revenue expenditure.
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