Capital Expenditure and Revenue Expenditure

A study of capital expenditure and revenue expenditure

Introduction

Capital expenditure and revenue expenditure constitute the total expenditure of a business in terms of accounting. They play a key role in the operation of firms, and impact the profit of corporation. In this essay, I will study the nature of capital expenditure and revenue expenditure and how they work in practice. This essay has been divided into five parts. The first part will define the capital expenditure and revenue expenditure, and give some examples to explain it. Then, I will show the difference between the two expenditures. Third, I will study depreciation associated with capital expenditure. In the forth part and final part, I will illustrate the confirmation of expenditure via accruals and prepayments.

The definition of capital expenditure and revenue expenditure

In terms of accounting, the term capital expenditure has come to be used to refer to funds utilized by firms to invest in non current assets such as property, industrial plants or equipment. By capital expenditure, corporation can maintain or increase current production capacity to meet the market demand and expand market shares. Moreover, capital expenditures are long-term investments. Firms could obtain the future benefit over a long period. When a firm buys a manufacturing device or builds a new plant, the expenditure generated from these purchases is considered to be a capital expenditure. The situation of capital expenditure may vary from one industry to another. For example, a telecom has to spend massive funds on telecommunications infrastructure. This spending will be classified as capital expenditure. In contrast, for a clothing enterprise, the capital expenditure only accounts for a small part of all outlays.

Revenue expenditure can be defined as the cost of maintaining the day-to-day run of companies. It offers immediate benefit for firms and contributes to the smooth and stable business run. Revenue...