Difference between Revenue Expenditure and Capital Expenditure

Difference between Revenue Expenditure and Capital Expenditure

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Revenue expenditure is also known as operating expenses (OPEX) and it neither creates any assets nor reduces the liability for the government. However, this type of expenditure is very important to smoothly conduct the everyday operations of the government. It is used for normally running government departments and their different services. It also includes wages, pensions, subsidies, interest payments on debt, etc. The grants to the state governments and union territories also come under this head even if some of them may be used for the creation of capital assets.

However, there are clear differences between revenue expenditure and capital expenditure because capital expenditure directly helps in reducing liability or creates assets for the government. While revenue expenditure is recurring and regular, capital expenditure is non-recurring and irregular. Thus, revenue expenditure is short-term whereas capital expenditure is long-term. Revenue expenditure does not have a physical presence while in the case of capital expenditure it has a physical presence other than intangible assets. There is no value addition of an existing asset in revenue expenditure while capital expenditure improves the value of an existing asset. In terms of impact on revenue, capital expenditure does not reduce business revenue while revenue expenditure does.

While going through the revenue expenditure and capital expenditure difference ,it can be observed that revenue expenditure is an unwanted expenditure for the government. Yet, this type of expenditure is required by every government to carry out its day-to-day functioning and typically includes employee salaries, rent, electricity charges, taxes, etc. Revenue expenditure always appears in the income statement and everything can be determined from it. However, capital expenditure shows itself as assets on the balance sheet while some portion of it may also show in the income statement. Thus, revenue expenditure meets the operational cost of the government while capital expenditure adds newer resources.

There is also a clear distinction between revenue expenditure and deferred revenue expenditure in that the latter is a type of revenue expenditure but the benefits of it last for more than one financial year. It can be a huge amount of expenditure that may pertain to the future years and is thus, deferred over a period. For example, advertising expenditure and cost of research are clear examples of the same as the results may be obtained over multiple future years.