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If you use a lot of financial terms to run your SaaS business every day, you can expect to sometimes confuse two terms that have the same meaning. You can confuse deferred revenue with fulfilled receipts or with backlog. These mistakes are easy to make, but they may bring unexpected and serious consequences to your business.
The difference between capital and revenue is another example of two similar terms that can be confused. Knowing how to track everyone can mean saving a lot of money over time, and should become an important part of your accounting strategy.
What is Capital Expenditure?
Capital expenditures are considered to be funds used by a firm, business, enterprise or organization to acquire, modernize and maintain its assets, facilities and equipment. These assets include the operating system and factory, real estate and equipment This mainly concerns works, equipment, infrastructure, etc. These assets are generally long term and provide productivity for over more than one reporting period.
When a business or organization invests in assets to generate profit in the coming days, those expenses are primarily the cost of capital. At the cost of the investment, companies and enterprises can buy new equipment and even use it for plant maintenance.
Examples:
- Office building (the cost of buying and maintaining one or more buildings)
- Work equipment, such as computers, printers, coffee machines, furniture, and other equipment.
- Patent, copyright, trademark, etc. companies must pay for the cost of these assets through annual depreciation in the years in which the company uses the assets.
What is Revenue Expenditure?
Revenue expenditure, also known as income expenditure, are expenditures that occur every day; in short, this is the total cost of an enterprise, company, or organization to maintain its profitability.
In the case of profit expenses, costs are related to assets that do not have capital characteristics because they will not generate any financial benefits outside the current reporting year, that is, the company or enterprise that caused these costs recognizes these costs and then take them into account reporting all the years that appear in the income statement or the financial analysis of the business.
In addition, income-related expenses can be divided into two categories:
1# Income-generating expenses
These expenses include daily expenses necessary for effective company management.
2# Maintenance costs of income-related assets
These expenses include the repair and maintenance of assets that are expected to generate income in the current reporting year and beyond.
Example:
- Staff salaries
- Delivery costs
- Organizational marketing and advertising costs
- Commissions for executives and franchisees
- Telecommunications operating expenses
Difference between Capital & Revenue Expenditure
| Parameters | Capital Expenditure | Revenue Expenditure |
| Meaning | Capital expenditure is the funds a company spends to acquire assets or improve the quality of existing assets. | Revenue expenditure are funds used by the company to maintain daily activities. |
| Time Span | Long-term basis | Short period of time, and are usually limited to one reporting year |
| Treatment in Books | Capital expenditure is included in the company’s cash flow statement. It is also displayed on the company’s balance sheet as fixed assets. | Revenue expenditure appears on the company’s income statement, but not necessarily on its balance sheet. |
| Purpose | These costs are incurred by the company to improve its income-generating capabilities. | These costs are expected to maintain its profitability. |
| Returns | Return for these expenses is not limited to one year, but is usually long-term. | Yields of these expenses is basically limited to the current reporting period. |
| Occurrence | Repeatability of investment not high | Expenses are recurrent |
| Capitalisation | Investment is capitalized | Income is not capitalized |
| Depreciation | Depreciation of assets is included in investment. | Asset depreciation does not apply to income and expenditure. |
| Profit & Loss | Capital Expenditure is not recorded in the Trading or Profit & Loss Account. | Revenue Expenditure is recorded in the Trading or Profit and Loss Account. |
| Balance Sheet | Capital expenses are recorded under the “fixed assets” item on the balance sheet. | Revenue expenses are not included in the balance sheet, but included in the profit and loss statement. |
| Examples | Purchasing equipment or patents, copyrights, installing equipment and supplies, etc. | Printed invoices for wages, salaries, utilities and stationery, inventory, postage, insurance, taxes and maintenance costs, etc. |
Key Differences between Capital & Revenue Expenditure
- Capital expenditure generates future economic benefits, and revenue expenditure only benefits the current year.
- The main difference between the two is that capital expenditure is a one-time investment; on the contrary, revenue expenditure is often recurring.
- Capital expenditure is shown in the balance sheet, assets and income (depreciation) statement, while the revenue expenditure is shown only in the profits and loss statement.
- Capital expenditure has been capitalized, not uncapitalized income.
- Capital expenditure is a long-term expense. On the contrary, revenue expenses are short-term expenses.
- Capital expenditure is to improve the company’s profitability; on the contrary, revenue expenditure is used to maintain the company’s profitability.
- Capital expenditure is not equal to investment income, not revenue expenditure combined with revenue.
Conclusion
Therefore, capital and revenue expenditure are very important to the company’s sustainable profitability. Revenue expenditure is mainly a recurring investment that does not generate immediate or delayed income. however, it is used to keep all the operations of the business or enterprise going smoothly.
On the other hand, capital expenditure is considered to be a long-term investment that is beneficial to the business in terms of profitability as well as longer positioning in the market. Today, it is essential for every business to understand the need to implement effective strategies in order to monitor and manage these costs to significantly improve overall profitability.
Both, capital expenditure and revenue expenditure are essential for companies to create profits today and in the future. Both have their own advantages and disadvantages. When investing, the company acquires an asset that can generate income. However, in the case of revenue costs, assets are not acquired in this way.