There are two main types of expenditures in business:

  1. Capital expenditures
  2. Revenue expenditures

This article provides a brief overview of capital and revenue expenditures and offers definitions.

Capital Expenditures

Definition and Explanation of Capital Expenditures

An expenditure is a capital expenditure if the benefit of the expenditure extends to several trading years. Capital expenditure may include different types of expenditures, each of which is shown as an asset in the balance sheet.

First, expenditures incurred on the acquisition of fixed assets (tangible or intangible), which the business uses to earn profit and not for resale (e.g., land and buildings, plant and machinery, furniture and fixtures, goodwill, patent rights, and copyrights).

Second, the cost of fixed assets would include all expenditures necessary up to the time the asset is ready for use. For instance, the cost of all buildings purchased would include the price paid to the seller, legal charges, and the broker’s commission.

Similarly, the cost of machinery would include the purchase price, freight, import duty, cartage, octroi duty, and erection and installation charges.

Third, expenditures that result in an increase in the earning capacity of a business.

Examples include expenditures incurred in relocating the business and money paid for goodwill (e.g., the right to use the established name of an outgoing firm). These is because it will attract the old firm’s customers and, in this way, lead to higher sales and profits.

Fourth, money spent on improving existing assets so as to increase their life or reduce the cost of production (e.g., converting hand-driven machines into power-driven machines).

Fifth, expenditures incurred on the extension and addition of existing fixed assets. Examples include the cost of making additions to the building, furniture, machinery, or motor vehicles.

Finally, any expenditure that is incurred to raise capital for the business (e.g., commission and brokerage paid to an agent to arrange long-term loans, or discounts on the issue of shares and debentures).

Examples of Capital Expenditures

The following are the most important items of capital expenditure:

  • Purchase of machines, furniture, motor vehicles, or office equipment
  • Cost of goodwill, trademarks, patents, copyrights, patents, and designs
  • Expenditure on installation of plant and machinery and other office equipment
  • Additions or extension of existing fixed assets
  • Structural improvement or alterations to fixed assets that increase their lifetime or earning capacity
  • Preliminary expenses of a limited company
  • Interest on capital during construction periods
  • Development expenses (e.g., for mines and plantations)

Revenue Expenditures

Definition and Explanation of Revenue Expenditures

An item of expenditure for which the benefit expires within the year is classed as revenue expenditure. Revenue expenditure does not increase the efficiency of the firm.

Expenditures incurred for the following purposes are treated as revenue expenditures:

  • Expenditures incurred for the purpose of floating assets (i.e., asset for resale purposes such as cost of merchandise, raw materials, and stores required for manufacturing process).
  • All establishment and other day-to-day expenses incurred in the operation and administration of the business (e.g., salaries, rent, taxes, postage, stationery, bank charges, insurance, and advertisement charges).
  • Expenditures incurred to maintain fixed assets in proper working condition (e.g., repairs, replacement, and renewals for buildings, furniture, and machinery)

Examples of Revenue Expenditures

Examples of important items of revenue expenditure are shown as follows:

  • All expenses incurred in the ordinary conduct of business (e.g., rent, salaries, wages, free samples, advertising costs, and so on)
  • Expenses incurred by way of repairs, renewals, and replacement for the purpose of maintaining existing fixed assets
  • Cost of merchandise bought for resale
  • Cost of raw materials and stores purchased for manufacturing
  • Wages paid to manufacture products for sale
  • Freight and cartage paid on merchandise purchased
  • Cost of oil to lubricate machinery
  • Vehicle servicing
  • Any expenditures incurred in defending lawsuits relating to the sale or purchase of merchandise

Do you want to test your knowledge about capital and revenue expenditure? We have prepared quizzes for you.

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Frequently Asked Questions

What is the difference between capital expenditure and revenue expenditure?

Capital Expenditures are outlays that increase the efficiency of the firm. A business incurs Capital Expenditures to acquire new, better, or more-advanced goods and services. Revenue Expenditures do not increase a company's efficiency.

What are examples of capital expenditures?

Examples of Capital Expenditures include: the purchase of a factory and buildings, the purchase of machines and equipment, goodwill, trademarks and patents. Expenditures on installation of plant and machinery and office equipment are also considered Capital Expenditures. Adding or extending existing Fixed Assets is another example of Capital Expenditure. Structural improvement to Fixed Assets that increases lifetime or earning capacity of Fixed Assets is another example of Capital Expenditure. Preliminary expenses which a limited company incurs in order to have sufficient funds for starting its business are also included as Capital Expenditures.

What are examples of revenue expenditure?

Examples of revenue expenditure include: wages to sales people, rent, repairs and replacement for buildings, furniture and machinery, expenses incurred in the ordinary course of business such as postage, wages and salaries. Expenditure on Trial Balance before starting a new business is also considered to be revenue expenditure. Any expenses included in the cost of sales is also considered to be a revenue expenditure.

What are examples of non-recurring items?

Examples of non-recurring items include: a factory or machinery installed by an enterprise that is not for sale, payment of insurance premium in advance and others.

What are examples of recurring items?

Examples of recurring items include: rent, wages and salaries, advertising expenditure and others.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.