Capital and revenue expenditure
When a business starting from scratch might have a small amount of cash in the bank account of the company. However, while trading, the business might need some assets to run it efficiently. Therefore, the industry spends money on fixed assets such as land and buildings, machinery, and equipment called capital expenditure. The payment for these assets is from the original capital or the retained profits or surpluses as the business trades from year to year. It called capital expenditure.
Capital and revenue expenditure
Then any expenses made to improve these assets added to the same asset account that increases the book value of these assets. A budget created for the business cost of capital expenditure included in the budget, so it protects from overspending on capital investments.
Here is an example showing the machinery account:
| Date | Machiney account | $ | |
| Apr-01 | Balance b/f | 4500 | |
| May-31 | New machine | 1200 | |
| 5700 |
At the end of the year, the balance of $5700 in the machinery account will show under the heading fixed assets in the balance sheet of the business.
Revenue expenditure
Revenue expenditure appears as a debit in the trading or profit and loss account at the end of the financial year.
Here is the illustration of how it appears in your books.
Revenue expenditure charged to that account as soon as the cost incurred. Expenses incurred in the administration of the business
| Advertising | |||||
| Date | Date | ||||
| Apr-01 | Paid | 35 | Mar-31 | Transfer to P & L a/c | 175 |
| May-01 | Paid | 76 | |||
| Jun-01 | Paid | 64 | |||
| 175 | 175 |
Capital and revenue expenditure
Example of revenue expenditure
Revenue expenditure refers to the cost of maintaining and operating these capital assets, including all repairs. It also embraces all the expenses of preserving sales revenue and all trading expenses. Such as payment of wages and salaries, materials bought for re-sale or conversion, advertising, insurance, heat & light, repairs, and transport; these are all debits found in the profit and loss or trading account.
Revenue expenditure
Debited and charged to the profit and loss account, reducing the gross profit to attain the net profit.
Capital expenditure
Debited to asset accounts and taken to the balance sheet under the heading of fixed assets. It should charge to profit and loss account to decrease the profit.
Any business when functioning need to take care of capital and revenue expenditure.