Capital and Revenue Expenditures

Capital expenditure is the outflow of funds to acquire an asset that will benefit the business
more than one accounting period. A capital expenditure takes place when an asset or service is
acquired or improvement of a fixed asset is effected. These assets are expected to provide
benefits to the business in more than one accounting period and are not intended for resale in
the ordinary course of business. In short, it is an expenditure on assets which is not written off
completely against income in the accounting period in which it is incurred.
Revenue expenditure is the outflow of funds to meet the running expenses of a business and it
will be of benefit for the current period only. A revenue expenditure is incurred to carry on the
normal course of business or maintain the capital assets in a good condition.
It may be pointed out here that an expenditure need not necessarily be a payment made to
somebody in cash - it may be made by cash, by the exchange of another asset, or by incurring
a liability. Expenditure incurrence and expenditure recognition are distinct phenomena. Expenditure
incurrence refers to the receipt of goods and services, whereas expenditure recognition is a
matter to be decided whether the expenditure is of capital or revenue nature, for example, the
buying of an asset is a capital expenditure but charging depreciation against profit is a revenue
expenditure, over the entire life of that asset. Most of the capital expenditures made by a business
become revenue expenditures. On the application of periodicity, accrual and matching
concepts, accountants identify all revenue expenditures for a given period for ascertaining
profit. An expenditure which cannot be identified to a particular accounting period is considered
of capital nature.