Capital and Revenue Expenditures Impact on Business: Earning money necessitates spending money in business. In order to grow and scale a micro, small or medium-sized business by earning profits, it is important to put the money earned back into the business as an investment. Investments in a business could be either for the long term or for the short term to enhance business efficiency for growth in returns.
Long-term investments are broadly called capital expenditure while short-term investments are referred to as revenue expenditure.
Capital Expenditure vs Revenue Expenditure
Capital expenditure (CapEx) is incurred by a company to either buy, upgrade, or maintain physical fixed assets such land, building, equipment, plant & machinery etc. They are generally one-time purchases intended to improve the business’s capacity or capability for generating revenue over a longer period.
In contrast, revenue expenditure, also known as operating expenditure or OpEx are expenses incurred in day-to-day operations and are recurring in nature such as rent, electricity charges, employee salaries, inventory, insurance, stationery, raw material charges, taxes, business travel, etc. They are not related to supporting revenue generation for business nor do they add any value to the business’s assets.
How to Calculate Capital and Revenue Expenditure
Capital expenditure is calculated as the sum total of the net increase in assets and depreciation expense and is shown in the business’s cash flow statement and balance sheet under fixed assets. For example, the purchase of property and plant & equipment (PP&E) at the beginning of 2022 was worth Rs 5 lakh and at the end of 2022 was Rs 10 lakh while depreciation stood at Rs 2.5 lakh.
Here the net increase in assets was Rs 5 lakh (PP&E at the start of 2022 less PP&E at the end of 2022). Adding the depreciation expense of Rs 2.5 lakh to it would give CapEx of Rs 7.5 lakh.
Revenue expenditure, on the other hand, is calculated by subtracting the cost of goods sold from the total income of the business and adding the difference to the price of goods sold in a given period. It is shown in the income statement. For example, if a company spends Rs 15 lakh as rent for a property, it is a revenue expenditure for a company.
Types of Capital and Revenue Expenditure
CapEx is usually of two types — fixed assets or tangible and non-tangible. While fixed assets, as discussed, are long-term assets such as land, machinery, building, vehicles etc., intangible assets are patents, business licenses, software, or trademarks.
With respect to revenue expenditure, there are two types — direct and indirect expenses. Direct expenses are incurred in daily operations such as electricity, logistics cost, raw material cost, fuel, etc. Indirect expenses, on the other hand, are also expenses incurred in day-to-day operations but not directly related to goods sold such as rent, office expenses, telephone bills, legal fees, etc.
