The difference between capital and revenue expenditures:Based on Costs with Respect to the Accounting Period to Which They Apply, Expenditures can be divided into two broad classes:(1) capital expenditures and(2) revenue expenditures.
Difference Between Capital And Revenue Expenditures : Capital expenditure is intended to benefit future periods and is classified as an asset. Revenue expenditure benefits the current period and is termed an expense. An expenditure classified originally as an asset will flow into the expense stream when the asset is either consumed or charged off.
The difference between capital and revenue expenditures is essential to the proper matching of costs and revenue and to the accurate measurement of periodic income. While the difference between capital and revenue expenditure is generally observed on a precise interpretation and application is not always feasible or practical.
The initial classification depends in many cases upon:
(1) the attitude and action taken by the management toward these expenditures and
(2) the character of the company’s operations.
Management’s decision on classification is often influenced by the ease and accuracy with which costs may be allocated among products, departments, territories, or any other desirable division. The amount of the expenditure and the number of detailed records and underlying documents required are also factors that determine the difference between capital and revenue expenditures.
Whatever classification is decided upon can and does affect the computed unit costs and reported profit figures of a fiscal period.