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Revenue and capital expenditure are aspects of business management that seem very similar at first. Both revenue and capital expenditure are concerned with spending money to help a business survive and grow. The key difference between the two is the intent of the expenses and where the money goes. Revenue is for short-term costs that are not used afterwards to make the company grow, such as repairs. Capital expenditure is for long-term assets, such as new vehicles or software, which will be used to make the company stronger.
Revenue expenditure is money being spent immediately for short-term purposes. These are expenses associated with assets, such as repair, that may or may not increase the life of the given asset. Revenue expenditure is more often associated with day-to-day costs the company accrues through its life cycle.
Capital expenditure is money is being spent on assets that will increase the company’s ability to pull in profit or operate at a higher performance level. New software, vehicles, machinery and tools that will be used for at least 12 months are considered capital expenditure. Capital expenditure, unlike revenue, is looked at more as an investment than a cost, because it is being used to strengthen the company so it can do better business.
When purchasing a capital asset, a business either will spread the cost out over the asset’s life or will purchase the asset outright. If the asset is one that will depreciate in value, such as a vehicle, the expense is usually logged over the life cycle. If the asset will remain in the same condition, such as software, the expense is logged all at once.
While capital expenditure is supposed to bring in growth and strengthen the company, this is not always the case. Sometimes the capital expenditure will end up not increasing profit. Investors often look at capital expenditure as a good sign, but investors must also be skeptical because business profits may not increase.
Both revenue and capital expenditure amounts are recorded in separate accounts. By separating the two, it makes it easier for investors to know where the money is going and makes it easier to account for the associated costs of both expenditures. Some businesses participate in accounting fraud in which revenue and capital expenditure are combined to make it look as if the company is spending all its money on capital expenditure. This falsely leads investors to believe the company is spending a large amount of money on capital assets when it is not.