Which statement is true for the difference in Capital and Revenue Expenditure?

Q: Which statement is true for the difference in Capital and Revenue Expenditure?

Which statement is true for the difference in Capital and Revenue Expenditure?

Question

Accepted Answer

The correct option is 4:
Capital expenditure (CapEx) is defined by its core objective: to either acquire a new asset or perform a major upgrade that significantly extends the life, efficiency, or capacity of an existing asset. This expenditure is capitalized (treated as an asset) because its benefit spans multiple accounting periods, fundamentally *increasing the long-term earning capacity* and productive potential of the business. Conversely, revenue expenditure (RevEx) comprises the day-to-day running costs, such as routine repairs, salaries, rent, and utility bills. These expenses are essential, but their function is strictly to *maintain* the current level of operations and earning capacity. Therefore, the most accurate distinction lies in the economic effect: CapEx is an investment for growth, while RevEx is an expense for sustenance.

The incorrect option is 1:
This statement incorrectly reverses the fundamental accounting principle regarding the duration of benefit. Capital expenditures are defined as having a benefit that lasts for more than one accounting period, which is why they are treated as *long-run* assets. Revenue expenditures, such as consumption of raw materials or payment of monthly rent, are consumed or expire within the current period, making them *short-run* costs.

The incorrect option is 2:
The terms Capital Expenditure and Revenue Expenditure are classifications used universally in financial accounting to categorize the expenses of an *individual business firm*. These concepts are not exclusive or primarily defined for an entire industry versus a single firm. Both expenditure types are recorded in the books of the firm to accurately prepare its Balance Sheet (CapEx) and Income Statement (RevEx).

The incorrect option is 3:
This statement is fundamentally flawed from an accounting perspective, as *all* expenditures must be recorded in the books of business under the double-entry system. Capital expenditures are recorded on the Balance Sheet as assets and depreciated over time. Revenue expenditures are recorded on the Income Statement as current expenses to match against revenue and correctly calculate the profit or loss for the period.