Capital Expenditure and Revenue Expenditure

Capital Expenditure and Revenue  Expenditure

Capital Expenditure

Capital expenditure refers to the money a business spends to buy, maintain, or improve its long-term assets. These assets are expected to be used for more than one year and help the business generate revenue over time. Capital expenditure is usually a significant investment and includes costs related to purchasing or upgrading physical assets.

Examples:

  • Buying a Building: If a business purchases a new office building, the cost is a capital expenditure because the building will be used for many years.
  • Machinery and Equipment: Purchasing new machines for a factory to increase production capacity.
  •  Vehicle Purchase: Buying delivery trucks for a logistics company. Revenue Expenditure

Revenue Expenditure

Revenue expenditure refers to the money a business spends on its day-to-day operations and short-term needs. These expenses are necessary to run the business and are typically recurring. Revenue expenditures are fully consumed within the accounting period in which they are incurred and do not create long-term assets.

Examples:

  • Salaries and Wages: Paying employees their monthly salaries.
  • Utility Bills: Paying for electricity, water, and internet services used in the business. 
  • Rent: Paying for the lease of office space or equipment.

Capital Expenditure Revenue Expenditure
Purpose Long-term investment in assets Day-to-day operational expenses
Duration of benefits Provides benefits for more than one year Benefits are consumed within the current
Impact on assets Creates or enhances long-term assets Does not create long-term assets, but maintains current operations

Multiple Choice Questions

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Question 1: Which of the following is an example of capital expenditure?
A) Paying monthly utility bills
B) Purchasing new machinery for a factory
C) Paying employee salaries
D) Buying office supplies
Explanation: Capital expenditure refers to funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. Purchasing new machinery for a factory is an example of capital expenditure.
Question 2: Revenue expenditure is typically used for:
A) Buying a new building
B) Expanding production capacity
C) Day-to-day operational expenses
D) Acquiring long-term assets
Explanation: Revenue expenditure is the spending on the day-to-day running of a business, such as rent, utilities, and wages, which are necessary to keep the business operational.
Question 3: Which statement is true about capital expenditure?
A) It provides short-term benefits
B) It is fully consumed within the accounting period
C) It creates or enhances long-term assets
D) It does not impact the balance sheet
Explanation: Capital expenditure creates or enhances long-term assets, which are recorded on the balance sheet and provide benefits over multiple accounting periods.
Question 4: Which of the following would be classified as revenue expenditure?
A) Purchasing a delivery truck
B) Paying for office rent
C) Investing in new technology for long-term use
D) Building a new warehouse
Explanation: Revenue expenditure includes costs that are related to the day-to-day functioning of a business, such as office rent, which is necessary for daily operations but does not create a long-term asset.
Question 5: What is the key difference between capital expenditure and revenue expenditure?
A) CapEx is used for day-to-day operations, while RevEx is for long-term investments
B) CapEx benefits last within the accounting period, while RevEx benefits last over a year
C) CapEx creates long-term assets, while RevEx covers short-term operational costs
D) CapEx does not impact the balance sheet, while RevEx does
Explanation: The key difference is that capital expenditure (CapEx) creates long-term assets, while revenue expenditure (RevEx) covers short-term operational costs that are fully consumed within the accounting period.

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