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These two types of spending are called capital expenditure and revenue expenditure.
Capital Expenditure
Capital expenditure refers to spending on non-current assets that a business will use for a long time.
Non-current assets are resources that provide value over multiple years, such as buildings, machinery, or vehicles.
A new restaurant may need finance to buy kitchen equipment, rent a space, hire chefs and wait staff, and promote its grand opening.
Capital expenditure is recorded on the Statement of Financial Position (Balance Sheet) as it reflects the value of non-current assets owned by the business.
Revenue Expenditure
Revenue expenditure covers the costs of day-to-day operations.
Revenue expenditure is recorded on the statement of profit or loss (income statement) because it reflects the costs incurred to generate revenue during a specific period.
| Capital Expenditure | Revenue Expenditure |
|---|---|
| Benefits last for more than a year | Benfits last for less than a year |
| Non-recurring in nature | Recurring in nature |
| Purchase, modification or extension of a fixed asset | Day-to-day activities of the business |
| Adds value to the busines | Does not add value to the business |
Added Value
Added value refers to improvement or modification in something that increases its worth and utility.
To what extent does the distinction between capital and revenue expenditure rely on arbitrary human categorization?
Riddhi Manufacturing Company purchased a new machine for €100,000 in January 2025. This machine is expected to last for 10 years and will be used in the production of goods.
To install the machine, the company spent an additional €5,000. Later that year, the company spent €10,000 on repairing another older machine that had broken down unexpectedly during production.
Questions:
Solution
Question 1: Classify the €100,000 spent on the new machine and the €5,000 installation cost as either capital expenditure or revenue expenditure. Justify your answer. (10 marks)
Criteria for Evaluation:
Marking Breakdown:
Question 2: Explain whether the €10,000 spent on repairing the older machine should be classified as capital expenditure or revenue expenditure, and why this distinction matters for the company’s financial statements. (10 marks)
Criteria for Evaluation:
Marking Breakdown:
