Explain capital expenditure versus revenue expenditure with examples.

Explain capital expenditure versus revenue expenditure with examples.

• A. Capital expenditure maintains assets or covers day-to-day operations; example: routine servicing.
• B. Capital expenditure adds to asset base or extends life (e.g., purchase of a van); revenue expenditure maintains assets or is for day-to-day operations (e.g., repairs).
• C. Capital expenditure is always expensed in P/L; revenue expenditure increases asset.
• D. Capital expenditure only relates to intangible assets; revenue relates to tangible assets.

Answer: (B)

The main idea is distinguishing spending that creates or extends the useful life of an asset from spending that keeps the business running in the current period. Capital expenditure is when a cost adds to the asset base or extends its life, providing benefits beyond the current year. It is recorded on the balance sheet as an asset and is depreciated over its expected life. For example, buying a van increases the asset base and will be used for several years, so it’s capital expenditure. Revenue expenditure, in contrast, covers the day-to-day running of the business or routine repairs. It is expensed in the income statement in the period it is incurred because it does not provide benefits beyond that period. Routine servicing or minor repairs are typical revenue expenditures. Why the chosen answer fits: it states that capital expenditure adds to the asset base or extends the asset’s life, with a clear example (purchasing a van), while revenue expenditure maintains assets or is for day-to-day operations, with a typical example (repairs). This aligns with how costs are treated in financial reporting: CapEx goes to the balance sheet and is depreciated; RevEx goes to the income statement as an expense. Notes on the other statements: one line wrongly assigns routine servicing to capital expenditure, which is inconsistent with how such maintenance is treated. Another line claims CapEx is always expensed in the P/L and RevEx increases an asset, which reverses the actual treatment. A final line limits CapEx to intangible assets, which is incorrect because CapEx can be tangible (like vehicles) or intangible (like software).

The main idea is distinguishing spending that creates or extends the useful life of an asset from spending that keeps the business running in the current period. Capital expenditure is when a cost adds to the asset base or extends its life, providing benefits beyond the current year. It is recorded on the balance sheet as an asset and is depreciated over its expected life. For example, buying a van increases the asset base and will be used for several years, so it’s capital expenditure.

Revenue expenditure, in contrast, covers the day-to-day running of the business or routine repairs. It is expensed in the income statement in the period it is incurred because it does not provide benefits beyond that period. Routine servicing or minor repairs are typical revenue expenditures.

Why the chosen answer fits: it states that capital expenditure adds to the asset base or extends the asset’s life, with a clear example (purchasing a van), while revenue expenditure maintains assets or is for day-to-day operations, with a typical example (repairs). This aligns with how costs are treated in financial reporting: CapEx goes to the balance sheet and is depreciated; RevEx goes to the income statement as an expense.

Notes on the other statements: one line wrongly assigns routine servicing to capital expenditure, which is inconsistent with how such maintenance is treated. Another line claims CapEx is always expensed in the P/L and RevEx increases an asset, which reverses the actual treatment. A final line limits CapEx to intangible assets, which is incorrect because CapEx can be tangible (like vehicles) or intangible (like software).