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Capital & Revenue Expenditure – Differences

This is one of the MOST important concepts in accounting. Get this wrong, and your entire Balance Sheet and P&L Account will be incorrect!

Capital Expenditure

Definition: Expenditure incurred to acquire or improve fixed assets OR increase earning capacity.

Benefit: Long-term (more than one accounting year)

Shown in: Balance Sheet (as Asset)

Examples:

  • Purchase of land, building, machinery
  • Installation charges of machinery
  • Legal fees for buying property
  • Major repairs that extend asset life
  • Additions/extensions to building

Example: Bought machinery for ₹5,00,000

  • This is Capital Expenditure
  • Shows in Balance Sheet as "Machinery ₹5,00,000"
  • NOT shown in P&L Account

Revenue Expenditure

Definition: Expenditure incurred for day-to-day running of business OR maintaining existing assets.

Benefit: Short-term (current accounting year only)

Shown in: Profit & Loss Account (as Expense)

Examples:

  • Salaries, rent, electricity
  • Purchase of goods for resale
  • Repairs & maintenance (normal)
  • Insurance premium
  • Stationery, postage

Example: Paid salary ₹50,000

  • This is Revenue Expenditure
  • Shows in P&L Account as "Salary ₹50,000"
  • NOT shown in Balance Sheet

Key Differences

AspectCapital ExpenditureRevenue Expenditure
PurposeAcquire/improve assetsDay-to-day operations
BenefitLong-term (many years)Short-term (current year)
FrequencyOne-time/RareRegular/Recurring
EffectIncreases asset valueReduces profit
Shown inBalance SheetP&L Account
ExampleBuy machinery ₹10LRepair machinery ₹10K

Tricky Examples

1. Repairs

Normal Repairs: Revenue Expenditure
Example: Routine servicing of car ₹5,000

Major Repairs: Capital Expenditure
Example: Engine replacement that extends car life by 5 years ₹2,00,000

2. Wages

Installation Wages: Capital Expenditure
Example: Wages paid to workers installing new machine ₹20,000

Production Wages: Revenue Expenditure
Example: Wages paid to workers making products ₹50,000

3. Legal Fees

For Buying Asset: Capital Expenditure
Example: Legal fees for property purchase ₹50,000

For Defending Lawsuit: Revenue Expenditure
Example: Legal fees for court case ₹30,000

Why This Matters?

Scenario 1: Correct Treatment

Bought machinery ₹10,00,000 (Capital Expenditure)

Balance Sheet:

  • Assets: Machinery ₹10,00,000 ✅

P&L Account:

  • Depreciation on machinery ₹1,00,000 (10%) ✅

Profit: Not affected by full ₹10L, only by depreciation

Scenario 2: Wrong Treatment (Treated as Revenue)

P&L Account:

  • Machinery Expense ₹10,00,000 ❌

Result:

  • Profit reduced by ₹10,00,000 (WRONG!)
  • Balance Sheet doesn't show the asset (WRONG!)
  • Tax calculation wrong
  • Financial position misrepresented

Real-Life Impact

Case: A company spent ₹50 Crores on new factory building.

If treated as Revenue Expenditure:

  • Entire ₹50 Cr shown as expense
  • Huge loss in P&L
  • Share price crashes
  • Investors panic

Correct Treatment (Capital):

  • ₹50 Cr shown as asset
  • Only depreciation (say ₹2 Cr) shown as expense
  • Profit remains healthy
  • Investors happy

Quiz

Test Your Knowledge

Question 1 of 5

1. Purchase of machinery is:

Revenue Expenditure
Capital Expenditure
Deferred Revenue Expenditure
Not an expenditure

💡 Final Wisdom: "Capital Expenditure = Buying the car. Revenue Expenditure = Buying petrol. One is an asset, other is running cost!"

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