Expense and expenditure:
An expense is defined as that cost which is paid or given in exchange for something of value. That something can be produced or serviced. When this product or service costs a great deal it is expensive and when something does not cost a great deal it becomes inexpensive.
On the other hand, Expenditure, is defined as the amount spent for a long-term on an asset which gives a long-term benefit like building expenditure, furniture expenditure, plant expenditure etc.
There are three types of Expenditures as:
- Capital Expenditure is when someone spends money for generating profits for years or to expand the business.
- Example: Someone wants to start a business of cosmetic products. He will open a shop for it which is a one-time investment which means capital expenditure. Another example include purchasing of machinery for a factory which too will be one time spending.
- Since it is a one-time investment, it is non-recursive in nature.
- So the expenditure for the asset (in above example, shop or machinery) which is bought for generating profits for years will come under capital expenditure.
- Capital expenditures will be written on asset side of balance sheet of a company.
- The benefits of spending will be counted for years.
- capital expenditure is also called as CAPEX.
- Revenue Expenditure is when anyone spends money to run his day-to-day business.
- Example: Let a person opens a cosmetic shop, for running his business, he will have to buy the cosmetic products from a dealer or manufacturer, there will be some electricity charges, he might employ another person to look for the shop and products, etc. So the money spent on these things which are required for running the business will be the revenue expenditure.
- So it is a short term as compared to capital expenditure.
- This expenditure will be recursive in nature, i.e. revenue expenditure will have to be done frequently unlike capital expenditure.
- Revenue expenditures will be written as liabilities in balance sheet of a company.
- The benefits of spending will be counted only in the current financial year.
- Deferred Revenue Expenditure is the Revenue Expenditure whose benefits can be extended to a number of years.
- Example: Spending on advertisement of company will help in the day-to-day business of company but if it is extended for another year, it will be Deferred Revenue Expenditure.