Revenue expense is an expenditure which on expense of operating on day to day basis and is essential to be cover to maintain the business going on successfully. Hence, income expense is the money or credit that being invested immediate for short-term function, example, expenditures on assets such as repair work and fuel which will or will not improve the worth of the given properties.
Capital expense is an expenditure which will cause future advantage to the company. It’s the cash that invests in the fixed possessions or enhances the worth of existing properties which will increase the company’s strength to pull in profit or greater efficiency level.
Unlike revenue expense, capital investment is more to an investment than an expense, since it create better organisation for the company. (Stolowy and J.Lebas 2006, p 234).
Capital investment is expenditure on set properties or increasing their earning capacity. Meanwhile, revenue expense is to maintain their earning capability. The distinction being that capital investment increase the earning capacity, long-lasting and produce future benefits, while income expense keep the earning capacity, short-term and produce instant advantage.
(ACCA F3 2009).
Capital investment defined as expense on purchase or enhancement of non-current possessions. For example that buys a van to deliver the products. Other example such as:- -Delivery of repaired assets-Legal cost of purchasing property.
– Installation of fixed assets-Demolition expenses.
– Improvement (but not repair) of fixed possessions.
– Architects fees.
Profits expense specified as expense on running or management of organisation, example, expense of fuel or diesel for vans.
Other example such as:
– Maintenance of set properties.
– Administration of company.
– Offering and distribution expenditures.
The main distinction in between the 2 kinds of expenditure is that effect it has of the financial declaration of company as the Balance Sheet and the Income Statement. Income expense impacts in the earnings declaration considering that it is completely take in within the period or carry forward to the next period as left over.
Capital expenditure improve the net book or obtain value of an asset or getting a new asset on the books. It is a long term expenditure and will be wrong to be set off as an expense in the current period. It is because that that fixed asset will pull in profit to the company for more than one year or accounting period. We can spread the cost of the asset over those accounting period in the form of depreciation since the fixed asset is used for several accounting periods. (Spiceland, Thomas, Herrmann 2009, p308 and p309)
Revenue expenditure shown on the income statement as an expense while capital expenditure treated as fixed asset on the balance sheet. It is necessary to classify these expenditure accurately in the accounting system to avoid uncertain errors. For example, if cost of a van was treated as an expense in the income statement, this will affect the net profit to be reduced; in the meantime the value of the van (fixed asset) will not show on the balance sheet. Hence, incorrect treatment of these expenditure will result:- (Wood 2012, p277) Capital expenditure – treated as – Revenue expenditure
Income Statement Balance Sheet Expenses increaseNet profit decreaseFixed assets decrease.
Revenue expenditure – treated as – Capital expenditure
Income Statement Balance Sheet Expenses decreaseNet profit increaseFixed assets increase.
Inappropriate asset classification can skew the financial position and profit of a business. Thus, it’s necessary to classify assets correctly and accurately. Decent classification of the expenditure maintains the fundamental accounting assumption of accrual, reasonable presentation and accuracy of presentation.