The Cost Of Revenue And Capital Expenditure

1783 Words Apr 26th, 2016 8 Pages
Revenue expenditure is defined as “a cost that is charged to expense as soon as the cost is incurred. By doing so, a business is using the matching principle to link the expense incurred to revenues generated in the same accounting period. This yields the most accurate income statement results,” (Revenue Expenditure, n.d). On the other hand, capital expenditures are defined as “the funds or assumption of a liability in order to obtain physical assets that are to be used for productive purposes for at least one year. This type of expenditure is made in order to expand the productive or competitive posture of a business. A capital expenditure is recorded as an asset, rather than charging it immediately to expense. The fixed asset is then charged to expense over the useful life of the asset, using depreciation” (What is a capital expenditure, n.d). The distinction between revenue and capital expenditures is important because revenue expenditure is charged as soon as the cost is incurred, while capital expenditure is depreciated over the life of the asset. “If the asset’s life is increased, the efficiency provided is increased, or if output is increased, its service potential has increased, and the cost of expenditure should be capitalized and written off over the expected period of benefit. All other expenditures made subsequent to acquisition should be expensed as incurred,” (Schroeder, Clark & Cathey, 2014, p. 318).
“Depreciation accounting is a system of accounting…
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