ðïļ What is Capital Expenditure?
Definition: Capital expenditure is spending on non-current assets that will be used in the business over a long period of time.
Capital expenditure (often called capex) involves buying items that help the business generate income for years to come. These are not used up quickly.
- Land and buildings
- Machinery and equipment
- Vehicles (delivery trucks, company cars)
- IT systems and software licences
If it lasts longer than a year and helps the business earn money â it's capital expenditure! ðĒ
ð What is Revenue Expenditure?
Definition: Revenue expenditure is spending on the day-to-day running costs of a business that are used up within a short period (usually less than one year).
Revenue expenditure (often called opex) covers the regular costs needed to keep the business operating. These costs recur frequently.
- Wages and salaries
- Rent and utility bills
- Raw materials and stock
- Advertising and marketing costs
Revenue expenditure is used up quickly and needs to be paid again and again â like filling up a car with petrol ð
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âïļ Capital vs Revenue Expenditure
Understanding the difference matters because capital and revenue expenditure are treated differently in the final accounts.
Quick comparison
- Capital = long-term assets (buildings, vehicles) â appears on the balance sheet
- Revenue = short-term running costs (rent, wages) â appears on the profit & loss account
Why does it matter?
- Classifying expenditure incorrectly distorts profit figures
- Capital items lose value over time (depreciation)
- Revenue items are fully deducted from profit in the year they occur
- Investors and managers need accurate figures to make decisions
Example: A restaurant buys an oven for $5,000 (capital expenditure) and spends $200 per month on electricity to run it (revenue expenditure).
ðĪ Tricky Examples
Some items can be confusing â the key question is always: will it last more than one year?
- Buying a delivery van = capital (lasts years)
- Petrol for the van = revenue (used up quickly)
- Installing a new computer system = capital (long-term use)
- Monthly internet subscription = revenue (recurring cost)
- Repainting the office = revenue (maintenance, not a new asset)
- Building an extension to the factory = capital (adds long-term value)
Exam trap: Repairs and maintenance are REVENUE expenditure even though they involve physical items â they don't create a NEW asset! ðŠĪ