Difference Between Capital and Revenue Expenditures

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 28, 2023

It can be hard to decide whether a particular item of expenditure is of a capital nature or a revenue nature.

Some expenses may lie on the borderline, making it complex to determine whether they are capital or revenue expenditures.

This difficulty is easily avoided by answering the following questions:

  • Is the expenditure incurred in acquiring a fixed asset?
  • Is the expenditure incurred for the improvement, addition, installation, or erection of fixed assets?
  • Does the expenditure increase the earning capacity of the business?
  • Has the expenditure been incurred to raise capital for the business?

If any of these questions are answered in the affirmative, the expenditure is capital; by contrast, if the answers are in the negative, then the expenditure is revenue.

Difference Between Capital and Revenue Expenditures

It is always possible to distinguish between capital and revenue expenditure in a straightforward way due to the following reasons:

1. Certain expenses are considered items of capital expenditure for one business but items of revenue expenditure for others.

For instance, in an engineering firm, plant and machinery may have been purchased to earn profit and others may have been purchased for use in the business.

However, in a real estate business, land and buildings purchased are items of revenue expenditure because they may be purchased for resale.

2. Certain expenses may be said to be partly capital and partly revenue expenditure. For example, the combined cost of repairs, alterations, and extensions of a fixed asset.

If there is a doubt as to the nature of any item, students should make a note at the foot of their solution as to the method of treatment adopted.

Difference Between Capital and Revenue Expenditures FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.