The Differences Between Capital Expenditure and Revenue Expenditure

Abstract

Purpose- The entire paper is divided into different parts mainly focusing on the basic analysis of this two expenditure from accounting and taxation point of view by making special focus on the classification and rules for determination of this two expenditure. This paper covers an extensive analysis of capital expenditure and revenue expenditure, and it also covers its diverse relationship in accounting.

Design/methodology/approach-This paper also covers various organizational objectives following the classification of this two expenditure. Also, an in-depth literature provides the technical findings concluded by various authors and researchers in relation to capital expenditure versus revenue expenditure. Moreover, this paper also covers: The detailed accounting treatment of capital expenditure, revenue expenditure and deferred revenue expenditure; The detailed overall analysis of risk associated with the classification of this two expenditure; The detailed comparative benefit and challenge in relation to the recognition and classification of this two expenditure.

Findings- Financial statement has been considered as the basic means of transferring the complete picture in relation to the excellent performance of an organization and it also has been considered as the basic basement of making the best decision from stakeholders’ point of view. Therefore, recognition and classification of capital expenditure and revenue expenditure is crucial for the development of accurate and reliable financial statement within an organization.

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Practical Implications- Proper recognition and classification of various expenditure incurred by an organization during business operation is quite necessary for the proper development of financial statement with total compliance of the applicable accounting standard and total provision of the applicable accounting law.

Originality/value- In an organization, financial success is crucial based upon the consideration and treatment of this two expenditure in financial accounting. As a result, the consideration and treatment of this two expenditure in financial accounting is very important based upon its fundamental rule and guideline. The financial statement of an organization is one of the most important communication tools between the organization and its various stakeholders.

Keywords- Capital expenditure, revenue expenditure, and deferred revenue expenditure.

Paper type – Research paper

Acknowledgement

I extraordinary express my appreciation towards Brunel University for bestowing me the chance to pursue MSc Accounting and business management.

My sincere gratitude and warm appreciation for my supervisor, Dr Radha Shiwakoti, for leading me through the difficulties, throughout my study journey at Brunel, providing me the constant and unconditional support and encouragement to keep my best foot forward. His thoughtful insights have enriched my work.        

I prefer to thank professor Raffaella Valsecchi, for enlightening me with her professional knowledge in the field of accounting. The extensive content of the course has enriched my academic cultivation and put the foundation for the thesis.

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Table of Contents

Chapter 1. Introduction. 5

1.1 Research Background. 5

1.1.1 Advantage and Disadvantage. 7

1.2 Research Gap, Question and Objectives. 8

1.3 The Detailed Items Contained in Capital Expenditure and The Revenue Expenditure. 8

1.3.1 Items part of the capital expenditures: 8

1.3.2 Items part of the revenue expenditures: 9

Chapter 2: Literature Review.. 10

2.1 Defining Expenditure. 10

2.2 Classification of expenditure under GAAP and IFRS. 11

2.3 Overview of Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure  12

2.3.1 Definition and Attributes of capital expenditure. 12

2.3.2 Definition and Attributes of revenue expenditure. 12

2.3.3 Definition and Attributes of deferred revenue expenditure. 13

2.3.4 Benefits of the use of expenditure in accounting firms. 14

2.3.5 Rules for determination of capital and revenue expenditure. 14

2.4 Points on the similarities and difference between Capital and Revenue Expenditure. 16

2.5 Points for pros and cons for the rules for determination capital and revenue expenditure. 17

2.5.1 Points on the support of revenue and capital expenditure on the accomplishment/success of financial statement 18

2.6 Challenges and benefits with capital and revenue expenditure. 19

2.6.1 The various challenges facing by an organization while taking the capital expenditure decisions  19

2.6.2 The various benefits facing by an organization while taking the capital expenditure decisions  20

2.6.3 The various challenges facing by an organization while taking the revenue expenditure decisions  20

2.6.4 The various benefits facing by an organization while taking the revenue expenditure decisions  21

2.7 How capital and revenue expenditure support the success of financial statement 22

Chapter 3: Methodology. 23

3.1 Research Approach. 23

3.4 Research Design. 25

Chapter 4 Results. 27

4.1 Analysis Procedure. 27

4.2 Preliminary analysis. 27

4.2.1 Analysis of major concepts of expenditure. 28

4.3 Thematic analysis. 29

4.3.1 Cash Flows and Accounting Income. 29

4.3.2 Incremental Cash Flow Principle. 29

4.3.3 Allocated Costs. 30

4.3.4 Excess Capacity. 30

4.3.5 Implementation of taxation and accounting. 31

4.4 Alternative Analysis. 35

Chapter 5 Discussion, Conclusion and Further Research. 36

5.1 Theoretical Contributions. 36

5.2 Managerial Implications. 37

5.3 Limitations and Future Research. 39

References. 41

Chapter 1. Introduction

1.1 Research Background

The firms all over the globe are in need of investments in capital expenditure for the purpose of attaining goals and objectives of the organizations and to bring in additional value to the firm and to enhance the wealth of the shareholders (Pols 2014).

Revenue expenditure is considered to be the expenses which are essential in order to undertake any kind of day to day transactions so that the activities of the business are performed in the most effective manner (Your Article Library 2020). Hence, it can be explained that revenue expenditure are the short term cash and credit transactions that are made by the organizations and does not enhance the value of the assets available to the organization.

The Differences Between Capital Expenditure and Revenue Expenditure

With the advent of time, the organizations have been looking to enhance their business activities as per their laid down goals. In order to undertake the business activities, it is vital for the companies to undertake capital expenditure and revenue expenditure with the help of which the long term and the short term business activities can be performed. As mentioned earlier, capital expenditure associates with the expenses that are made on the long term assets with the help of which the improvements and developments can be made in the fixed assets of the companies. The use of capital expenditure has increased as the organizations have been looking to develop their business (Yinusa, Aworinde, and Oseni, 2017). The frequency of use of capital expenditure has increased immensely in the current time period as it has been observed that most of the organizations listed under any of the stock exchanges disclose their capital expenditure within their financial statements. Close to 90% of the organizations functioning globally disclose their capital expenditure to the public so that investors and the other stakeholders can have an idea about the transactions and the expenses that are carried by the organizations (Marjit, Sasmal, Sasmal, 2020). The frequency of revenue expenditure within the current time period namely from the year 2014 to the year 2020 has increased immensely as it has been observed that most of the firms take day to day transactions for the purpose of daily business activities and accordingly prepare their income statements so that the amount carried forward can be recognized (Xplaind, 2020). It has been observed that almost 90% of the firms disclose their revenue expenditure and the disclosure of these expenses have increased drastically after globalization has taken place. The organizations are functioning in a competitive environment and therefore look forward to maintain competitive edge and it is due to this fact that the extent of capital and revenue expenditure have increased. The overall comparison of the two expenditure reveals that the frequency of revenue expenditure for the firms are higher in comparison to capital expenditure.

The recording of the revenue expenditure and capital expenditure started from the time when the organizations started recording their earnings and expenses. The recording of the earnings and expenses were essential in order to keep a track of all the business transactions that are taking place and to ensure that no mistakes and errors are present within the business activities (WallStreetMojo 2020). From the time the organizations started preparing the financial statements in order to record all their business activities, the firms initiated the recording of the capital expenditure and revenue expenditure. The recording of the capital expenditure initiated to be recorded and classified in the financial statements post industrialization when the companies understood the significance of financial reports and thereafter started posting their income and expenses. The development of various regulations and guidelines like the Companies Act 2013 initiated the firms to record their expenses in the financial statements. The German organizations were the ones who initially started the recording the expenses separately within their financial statements.

The key factors for the use of capital expenditure has been it assists the firms in understanding the costs that are incurred for developments and improvements in their long term assets. It even assists the firms in keeping a record of the transactions they are taking place so that they can use it for future reference. Capital expenditure is undertaken for the purpose of development and expansion of the organizations within the changing business environment.

The key factors for the use of revenue expenditure has been to determine the day to day transactions that firms require in order to maintain their daily business activities (Pragati 2016). The use of revenue expenditure ascertains the amount of cost incurred in various business activities with the help of which the firms can prepare their financial budget. Revenue expenditure reveals the total daily costs that a company makes and assists in making a comparison with the help of which the profit attained can be measured and the amount can be forwarded to the next day or the next month of an accounting year.

1.1.1 Advantage and Disadvantage

Capital expenditures takes into account all the major capital investments that a company makes so that it helps maintain or expand the business and generate additional profit. The problem that the firm is going to face is that it is not considered to be recurring in nature. However, revenue expenditure is considered to be recurring in nature and the problem is that it holds only short term benefits.

Capital expenditure is associated with the thought of development for the long term and therefore supports the companies with their long term goals and business developments. However, this is considered to be time consuming aspect for the business and thereby needs a lot of attention. On the other hand revenue expenditure concentrates on the short term activities of the business and assists in proper functioning of the daily activities (Meyer 2016). The limitation has been that the firms limited resources with the help of which they are able to differentiate among the expenses that are really vital for the daily operational activities of the company.

Capital expenditure is helpful in determining the accurate data for an organization with the help of which the firms are able to manage their capital projects in an effective manner. However, there are possibilities of high charge of interests if the expenses are borrowed from external funds. Revenue expenditure on the other hand assists the firms to determine the daily costs of the business with the daily profits of the business can be determined. However, the limitation of revenue expenditure has been unavailability of a proper structure with the help of which these expenses can be managed and controlled.

There are several factors due to which the capital and revenue expenditure are used globally as capital revenue expenditure assists the firms in undertaking proper business decisions. These two expenditure highlights the limitations of any business and sets the objectives of an organization. Capital and revenue expenditure assists the firms to make a comparison with their rival companies and understand the changes and actions that are required to improve their business activities from their competitors.

It has been observed that GAAP asks the long term assets to be valued at the historic cost and thereafter suitably depreciated. IFRS on the other hand initially the assets at cost which can be later revalued down or up to the market value. IFRS asks any separate elements of an asset with a different useful life to be separately depreciated but GAAP permits the depreciation of the component together. IFRS at the time of measuring investment property are done at the cost thereafter can be revalued to the market value but there are no separate category with respect to investment property in GAAP.

At the time of revenue expenditure recognition in IFRS cost of revenue are measured reasonably. IFRS permits the amount of revenue to be measured reasonably (Balak, Sondakh, and Pusung, 2016). IFRS does not allow the seller to have control once the goods are sold. On the other hand revenue expenditure recognition in GAAP takes place by recognizing the customer contract, recognizing the customer agreement obligations and determining the transaction price.

1.2 Research Gap, Question and Objectives

The objectives prepared for this paper has been to realize the aspects that needs to be considered at time of undertaking the analysis. One of the objectives of the paper has been to properly distinguish between capital and revenue expenditure and thereby determine how they are helpful for the development of a business. The next objective which is to be understood relates to the various items that are to be considered at the time of segmenting and disclosing the capital and the revenue expenditure (Jamshed 2014). The final objective of the paper has been to understand the profits or losses that is ascertained after undertaking capital and revenue expenditure by an organization.

RQ1: What are the differences between capital and revenue expenditure and how it assists the organizations with business developments?

RQ2: What are the items that are considered at the time of understanding the capital and the revenue expenditure for an organization?

RQ3: What are the gains or loss that emerges using the capital and revenue expenditure?

1.3 The Detailed Items Contained in Capital Expenditure and The Revenue Expenditure

1.3.1 Items part of the capital expenditures:

Some common types of capital expenditures found are listed below:

  1. Amount spent on acquisition of land, building, and plant and machinery
  2. Amount spent for acquisition of land and building as lease hold property
  3. Amount spent for purchase or development of furniture and fixture for the business use
  4. Amount spent for acquisition of cars, vehicles, vans, or lorries
  5. Amount spent on installation of fans or lights, etc
  6. Amount spent on erection of plant and machinery
  7. Amount spent for the acquisition of patents, trade mark, designs or copy rights
  8. Amount spent on preliminary expense of the business operation
  9. Amount spent for acquiring goodwill
  10. Amount spent for extension of existing line of fixed assets
  11. Amount spent in development of mines and plantations
  12. Amount spent on invention
  13. Amount spent on increasing the capacity of fixed assets
  14. Amount spent administration purposes during the period of construction

1.3.2 Items part of the revenue expenditures:

Some common types of revenue expenditures found are listed below:

  1. Amount spent on payment of salaries and wages to people working for the organization
  2. Amount spent on payment of rent or lease rental for office or factory premises
  3. Charging of depreciation or amortization of fixed assets or intangible assets
  4. Amount spent for purchase of consumable stores
  5. Amount spent for purchase of raw materials, work-in-process, or any finished goods directly
  6. Amount spent on payment of insurance premiums
  7. Amount spent on payment of various taxes and legal expenses
  8. Amount spent on repairing, replacements, or any renewals in order to maintain the working conditions of fixed assets
  9. Amount paid in form of interest on the borrowed amount of funds
  10. Amount spent for purchase of oil or any lubricate used in plant and machinery
  11. Amount spent on purchase of any merchandize for resale purposes
  12. Any other administrative or miscellaneous amount spent for day to day business operations

Chapter 2: Literature Review

2.1 Defining Expenditure

Definition

Expenditure represents the payment that is done either through the credit or cash for making the purchase of the goods or the services (Dimitriou 2018). Expenditure is recorded at a single time frame and then it is compared to that of the other expenses.

Expenditure flows can be characterized as real expenditure, planned values and aggregate flows. Real expenditure is associated with the concept of real monetary expenditures. In case of the planned values, the figures in the model provides the planned values and not the actual values. It is considered as the behavior of the economy in totality (Srivastava 2020).

Real Expenditure

The income determination theory is reliant on the real monetary expenditure concept. It is seen that national income and its various elements can be assesses at the current or constant process (Tom Gresham, 2020). In case the prices are held at constant, any changes in the real flow of investment or consumption will create a change in the actual output of investment goods or consumption.

Planned Values

The figures and the tables that are created in the models reveal the desired or the planned value and not the realized values. Planned expenses explains what the people are looking to spend and real expenses are known to be the amount people are successful in spending (Gray and Debreceny, 2014). Hence, discussion are made on the basis of the amount of purchases firms and households plan of investing. In case these plans are not fulfilled then there will be a differentiation among the planned and the actual expenditure.

Aggregate Flows

In the aspect of micro economy, the element that is taken into consideration is the behavior of the overall economy which is associated with the average behavior of the overall household and all the available companies. Hence, at the time of investment or consumption the average is taken into consideration which suggests that the overall amount of consumers or the companies that are planning to make expenditure on the investment and consumption of goods are taken into account (Sanko and Koldovskyi 2017).

2.2 Classification of expenditure under GAAP and IFRS

From the accounting point of view, total outlays of an organization can be broadly classified into three categories of expenditures:

(Source: Termscompared, 2020)

As per IFRS and GAAP, the classification of expenditure is based on three categories i.e. capital expenditure, revenue expenditure and deferred revenue expenditure. Capital expenditure takes into account the amount that is incurred so that it helps acquire the long term asset and , revenue expenditures are recurring expenses such as the cost of sales and the operating expenses. Lastly, deferred revenue expenditure is considered to be less common built helps in making a contribution towards the rise in the value of the asset in the balance sheet (El-Gazzar and Finn 2017).

Initially expenditure implied money that is spent on something. It is also considered while considering budget. However, the definition has changed significantly it is now referred to the payments that is made or liabilities incurred in the exchange of the services or the goods.  Expenditure usually considered capital expenditure but is considered as one cost and the incurred to receive the long term benefits (Lucchese and Di Carlo 2020).

There are three differences from past definition of expenditure to recent definition of expenditure. First, expenditure is usually considered as the capital expenditure and the incurred to receive the long-term benefit but is only considered as one cost in recent day. Second, expenditure in the past represented any kind of outflow of the money, however, in the current time period, it is considered to be the future benefit, the organizational evolvement and the business development. Third, expenditure was considered to be a loss for a household or an organization, however, with the advent of the time regarded as investment made with the help of which long-term benefit can be attained (Lessambo 2018).

2.3 Overview of Capital Expenditure, Revenue Expenditure and Deferred Revenue Expenditure

2.3.1 Definition and Attributes of capital expenditure

 “Capital expenditure is expenditure expected to profit an organization for more than one bookkeeping period.”(John and Meyer, 2016)

There are some attributes regarding capital expenditure. First, in contrast to revenue expenditure expensed out straight away in the period in which they are brought about, capital expenditure is capitalized on the statement of financial position and charged as a cost over various period through the procedure of the devaluation and amortization (John and Meyer, 2016). Second, it also known as capital expense or Capex expenditure and it also incorporated with the purchase of the intangible asset such as patent (Chen, Gavious and Lev, 2017). Third, so basic understanding of capital expenditure provides that it is an expenditure incurred during an accounting period, and the benefit available from such expenditure will be available for more than one accounting period. For example, in many cases, when an organization prefers to expand the operation or to make the acquisition of a new asset with an expectation to generate more revenue in longer period, as a result, it incurs the capital expenditure. In addition, in these circumstances, an organization requires a substantial amount of investment and a continuous maintenance of asset to keep them functional. Due to this reason, many organizations prefer to obtain finance from the open market to cover a substantial amount of investment in form of capital expenditure (Timban and Lambey 2016). Fourth, due to the nature of the investment is of the capital in nature, the available benefit from the investment is particularly for more than one accounting period, and business will get earning from the utilization of the investment over several years. Therefore, such organization cannot claim deduction of entire amount of investment in one accounting period rather it requires to spread this expenditure over the entire useful life of the asset acquired through this capital investment. Under the accrual method of accounting, the total value of the asset is shown on the face of the balance sheet under the non-current asset category, i.e.; property, plant, and equipment (Balak, Sondakh and Pusung 2016).

2.3.2 Definition and Attributes of revenue expenditure

“Revenue expenditure is an amount being spent for an expense that is matched immediately with the revenues of an organization reported during an accounting period.”

Revenue expenditure has its relevance with day to day operational activities of an organization where different types of expenditures required to be incurred by an organization in order to operate it successfully. The common types of revenue expenditures include; amount spent on repair and maintenance expenditures, general and administrative expenditures, selling and distribution expenditures, etc (Padmanabhan, 2018). Revenue expenditure is also known as operational or income statement expenditure. Revenue expenditure is not capitalized like a capital expenditure, because of its incapacity of providing future financial benefits to an organization. Revenue expenditure basically does not help an organization to add value to an asset or add more useful life or increase the productive performance of the asset, so it cannot improve the capabilities or capacity of organization in its operation (Corporate Finance Institute, 2020). Therefore, this type of expenditures are not added to the value of assets, rather it has been accounted in the income statement for the given accounting period in which it has been incurred. A revenue expenditure of an organization represents the money spent to get the short-term benefits which is particularly less than one accounting period. An organization incurred revenue expenditure mostly for the purpose of operating the regular business activities (Ilearnlot, 2020).

2.3.3 Definition and Attributes of deferred revenue expenditure

Other than capital and revenue expenditures, a third form of expenditure exists in between these two broad categories; is deferred revenue expenditure. Lukman et al. (2018) said that “Deferred revenue expenditure is expenditure which revenue in nature basically and incurred during an accounting period, however its benefits are to be available in multiple future accounting periods.”

This type of expenditure basically large in amount and most important the benefits associated with this expenditure are not consumed within an accounting period in which it is incurred. In order to match the revenue concepts attached with this type of expenditure, part of the amount is charged to the income statement of an accounting period and such amount is reduced from the total amount of expenditure to obtain the balance amount that would be shown on the face of statement of financial position as an asset which is actually a fictitious asset and not a real asset (Johnston and Kevin 2018). So, basically the deferred revenue expenditure refers to an advance payment for receipt of goods or services, therefore it is considered as advance form of prepaid expenses. Under this arrangement, an organization enters into an agreement with another organizations through which it receive the goods or services in future period, however it requires to make payment in advance today. And therefore, the organization considered the outlays made under this transaction as an asset until it receives all the correspondence benefits related to this payment (Padmanabhan 2018). From the accounting point of view, when the transaction is treated as an asset, it actually doesn’t affect the profitability of the organization because the organization does not have acquired any asset and also not received the full benefits attached to that asset and under this arrangement; an organization charges the outcome of the transaction over the given period of time as per agreement to the profit or loss statement of the organization.

2.3.4 Benefits of the use of expenditure in accounting firms

The use of expenses are helpful for the business development of an organization. Expenditure assists the accounting firms in realizing various business aspects with the help of which they are able to enhance their business activities and thereby understand the actual business scenario. Expenditure assists in understanding the asset valuation as depreciation expenses assists in determining the actual asset value with time (Termscompared 2020). Expenditure highlights the costs that a business needs to incur on a daily or yearly basis thereby the firms are able to understand the costs they have to bear in general and thereby prepare their budgets accordingly. Expenditure even assists in reduction in taxes as proper recording of the expenses highlights the actual earnings of the business and thereafter tax deductions are possible for the companies as well (Timban and Lambey 2016).

2.3.5 Rules for determination of capital and revenue expenditure

2.3.5.1 Definition of Determinants of Capital expenditure

Capital expenditures are those that will result into acquisition of permanent or fixed assets in the business organization that is being used continuously for the purpose of generation of revenue. Moreover, any amount being spent by an organization that resulted into improvement in the production or earning capacity or that helps in reduction of cost of production that would also be considered as capital expenditure. The decisions related to the capital expenditure is the way toward settling on choices in regards to interests in fixed resources which are not implied available to be purchased, for example, decisions related to acquisition of immovable properties, acquisition of plant and huge machinery, and so on (Corporate Finance Institute, 2020).

2.3.5.2 Attributes Rules for Determinants of Capital Expenditure

In order to determine the capital expenditures; following rules are set by the accounting practice (Jariwala 2018):

  • Expenditures on the fixed assets (land, building, machinery and equipment, patents or any furniture) with the purpose of earning profits are considered as capital expenditure. For example, furniture bought by ABC organization for the use by their employees will be considered as capital expenditure.
  • Expenditures done on new asset related to their cost and set up in order to put them into use are known as capital expenditure. For example, ABC bought new machinery worth $10,000 and additionally $1,000 was spent on it for set up. Thus total value of capital expenditure will be $11,000.
  • Expenditures done on existing machinery or plants (fixed assets) so as to improve their functions or expand business operations and desired to reduce the cost of operations or increase of the earning capacity are known as capital expenditure (Chawla, 2019). For example, expenditure incurred to increase the building space is a capital expenditure.
  • Expenditures whose benefits are consumed over a period of time are referred to as capital expenditure. For example, expenditure incurred to increase the building space is a capital expenditure.
  • Expenditures which are related to the increase in the financing of fixed assets or capital are known as capital expenditures. For example expenditure done on the brokerage or underwriting commissions.

2.3.5.3 Definition of Determinants of Revenue expenditure

Revenue expenditures incurred by an organization provides benefits for the current accounting period only and therefore all the revenue expenditures are debited to account of trading and profit or loss (Ilearnlot 2020).

2.3.5.4 Rules for Determinants of Revenue expenditure

Following are the important determinants or features of revenue expenditures in accounting:

  • When an organization incurred expenses for routine business operational purposes and having benefits for less than one accounting period would be considered as revenue expenditure. For example, amount spent for payment of salaries to the employees, rent to landlord, selling and distribution, interest paid on borrowed capital (Play Accounting, 2020).
  • When an organization spent amount for repair and maintenance of fixed assets, then it would be treated as revenue expenditure. For example, repair or plant and machinery, renewals or spare-parts, depreciation provided, etc (Play Accounting 2020).
  • When an organization spent amount on consumable items or goods and consumable services for resale in their original or improved shape, then it would be treated as revenue expenditures. For example, amount spent on acquisition of dried coconuts for resale purposes (Play Accounting 2020).
  • The explanations that have been provided in this section of the paper constitutes of the principles and the aspects which are in line with GAAP and IFRS. Both the regulations have placed the same attributes which have been explained in this section of the paper and therefore the organizations perform these operational activities in order to perform their business properly.

2.4 Points on the similarities and difference between Capital and Revenue Expenditure

Similarities

  • Both the expenditures are represented in the Income Statement of a company.
  • Capital and revenue expenditure are done in order to improve and maintain the earning capacity
  • Both the expenditure gives benefits in the future on the company.
  • Both the expenditures include investments of monitory amounts
  • Both the expenditure determine the performance and the development of a company

Difference

  • However the capital expenditure is represented in the Balance Sheet as well unlike revenue expenditure
  • However capital expenditure benefits are observed in long term whereas revenue expenditure benefits are observed in short term.
  • Benefits from capital expenditure are received for more than one year on the other hand revenue expenditure benefits are gained in the present accounting period. 
  • However the monetary amount of capital expenditure is higher than the revenue expenditure.
  • Capital expenditure is associated with the development of assets of a firm and revenue expenditure explains the money used for expansion purpose.

2.5 Points for pros and cons for the rules for determination capital and revenue expenditure

Capital Expenditure

Pros

  • Increase in asset
  • Elimination of unrequired machines and tools
  • Increase in productivity
  • Less use of manpower
  • Increase in uniqueness

Cons

  • Time period
  • No short term benefits
  • Irreversibility
  • Cost of depreciation
  • Risks

Revenue Expenditure

Pros

  • Revenue expenditure provides benefits for short term.
  • Low Initial costs
  • Time period
  • Future Benefits
  • Employee benefits

Cons

  • Irreversibility
  • Depreciation costs
  • Risks
  • Increase in liabilities
  • Investment increases

The points that have been explained with respect to the pros and cons of capital and revenue expenditure have been prepared on the basis of the regulations put forth by IFRS (Sanko and Koldovskyi 2017).

2.5.1 Points on the support of revenue and capital expenditure on the accomplishment/success of financial statement

  • Revenue and capital expenditure helps in planning for the futures plans of the organization so that the organization can gain form this expenditure which will be used to stabilize other costs of the organization.
  • Generation of a list of expenses that occurred in day to day activities of an organization along with the expenses related to the fixed assets helps in understanding the present market value and the estimation of future values. The understanding and estimation of these values provide the organization to form strategies for its other costs in order to gain profits.
  • Investments in capital expenditure supports the business at the time of crisis such as bankruptcy and the revenue expenditures helps in the acquisition of resources required for the proper functioning of business.
  • Revenue and capital expenditure provides the present and future capability of the organizations and their presence in the balance sheet helps in gaining investor’s confidence. 

There are various pros of the rules of determination of capital expenditure under IFRS affecting organization’s success:

1.         Capital expenditure helps in planning for the future plan of the organization so that the organi-zation can get gain from it which will be used to stabilize the other costs of the organization. In addition, it deals with the development of fixed assets which helps in the development of the organization in long term. Furthermore, it assists in the utilization of the fixed asset to their fullest to gain the maximum possible benefit from them (Sanko and Koldovskyi 2017).
 2. Capital expenditure occurred in the day-to-day activity of an organization along with the ex-pense related to the fixed asset helps in understanding the present market value and the future value estimation. The understanding and estimation of these value provides the organization the opportunity to form strategy for its other cost to assist in the calculation of the future profit forming the forecasting of the company’s long-term gain.

3. Investment in capital expenditure supports the business at the time of the crisis such as bankruptcy. It is seen that with the help of investments, the organizations are able to enhance their business activities with the help of which they are able to ascertain the profits and reduce the chances of bankruptcy.

Capital expenditure provides the present and future capability of the organization and its pres-ence in the balance sheet helps in gaining investor’s confidence. The present capability comprises of maintaining the performance of the company intact and the future capability involves the development of plans and strategies with the help of which developments can be made.

2.6 Challenges and benefits with capital and revenue expenditure

2.6.1 The various challenges facing by an organization while taking the capital expenditure decisions

  • Measurement problems: An organization by following the particular method of depreciation, an amount of depreciation is calculated every year that is reduced from the cost value of non-current assets and charged to the income statement of the organization (Accountlearning, 2020).
  • Uncertainty: The capital expenditure incurred by an organization provides benefits for more than one accounting period and it tends to relate with the future period benefits. However, certainly it is not possible for a business organization to identify whether anticipated future benefits will be derived by the organization or not, because of some inherent risks associated with the capital investment that is dependent upon the nature of business (John and Meyer, 2016).
  • Temporal spread: The costs as well as benefits associated with the capital expenditures are spread over more than one accounting period, for example; in case of industrial projects, capital expenditure related with 10-20 years and in case of infrastructural project it related with the 20-50 years of time period. Therefore, this temporal spread creates issues for the management in estimation of discount rates and establishing the equivalence (Accountlearning, 2020).
  • Intangible factors: Capital expenditure decisions are so important that an organization must focus on all these intangible factors also because an organization is highly responsible for selection of a project which is not advisable from the welfare of society as a whole (Accountlearning, 2020).

2.6.2 The various benefits facing by an organization while taking the capital expenditure decisions

  • Company valuations: The value of the company increases with the decisions taken with regards to capital expenditure. 
  • Long-term development: Capital expenditure deals with the development of fixed assets which helps in the development of the organization in long terms.
  • Proper utilization of resources: Capital expenditure helps in the utilization of the fixed assets to their fullest in order to gain the maximum possible benefits from them.
  • Forecasting: Capital expenditure helps in the calculation of the future profits that forms forecasting of the company’s long-term gains. 

2.6.3 The various challenges facing by an organization while taking the revenue expenditure decisions

  • Maintenance of short-term cash liquidity: It is very important for a business organization to maintain the short-term liquidity so that any liquidity problem does to arise (Devra Gartenstein, 2020).
  • Management of interdepartmental conflicts: An entrepreneur must be continually addressing why work is done, and how it tends to be accomplished all the more effectively. When a business manager has drawn up your stream graph, he will presumably begin to see that there are various extra and superfluous advances associated with his organization’s activities (Gary, et al, 2014).
  • Decisions making at departmental level: In order to develop the effective decision making at the departmental level, the management of the organization is required to educate and provide appropriate training to their employees (Mahmood and Ali, 2015). Furthermore, when an organization puts resources into its kin via training and programming, particularly in a downturn, it will receive the benefits of a work power that cooperate to benefit the organization. Also, on the off chance that a business manager effectively includes his workers in the cost administration process, he will get the best out of them. In the event that he frequently use the post for recommendations from his representatives he will, in actuality, discover better and more practical approaches to get things done (Kraft, 2015).
  • Back to the business plan: When management of the organization focusing on management of the revenue expenditures, it should not divert itself from the overall business plan of the organization. Each organization needs to have a drawn out business methodology. Cost the board ought to be a piece of the technique and be affected by the system. Cost choices ought to be estimated against the organization’s methodology, instead of a current transient circumstance.
  • Easy savings: The management of the revenue expenditures must be done in such a way, the organization can make easy savings to cover the short-term liquidity problems and for that it requires to maintain the minimum amount of cash balance (Bakshi, 2016). Moreover, when a business organization planning to make investment huge amount in future project after few years, it requires to make appropriate decisions for saving of earning to cover such future project capital expenditures (Termscompared, 2020). For example, if an organization is distributing entire amount of earnings in form of dividends to the investors and does not making any reinvestment in the business, then it would be difficult for the business to fulfil its long-term goals and such type of organization take time to grow as compared to the organization making regular reinvestment of the earnings in the business rather distributing in form of dividend to the investors (Corporate Finance Institute, 2020)

2.6.4 The various benefits facing by an organization while taking the revenue expenditure decisions

  • Revenue expenditure assists the organization in the preparation of the budget.
  • Short time forecasting are done with the help of revenue expenditure
  • Day to day activities expenditures are calculated with the help of revenue expenditure along with near future expenditures.
  • Revenue expenditure provides an understanding about the present market value and its expectations.

2.7 How capital and revenue expenditure support the success of financial statement

The use of capital and revenue expenditure determines the success of the financial statement in the way that the expenses that the companies do on capital and revenue expenditure assists in determining the profits they attain from the same and even reveals the amount of investments the companies make towards their growth which would attract potential investors to undertake investments with them.

Chapter 3: Methodology

3.1 Research Approach

The process of research includes the identification, location, analyzing and assessment of the all the key information that is essential for the answering the main objective or research question of a research and in the process helps the researchers to express and develop their own set of ideas (Isnaeni, Jamaluddin, and Budhi, 2019). Basically there are eight stages in a research process these stages are selection of a proper area for research. After this selection proper formulation of aim, objective and question with respect to the research is formulated. Then it is essential for have proper and just literature review conduction. Then critical analysis of the methods in order to collect data for research is done. After all these stages the primary data is collection upon whose completion analysis of the collected data comes making it the sixth stage. The seventh stage is the formulation of the conclusion on the basis of the analyzed data while the last step deals with the completion of the research. The last stage is the longest stage of research as it will require editing and feedbacks.

There are four methodologies I prefer to refer, they are: Quantitative, qualitative, inductive and deductive approach. The researcher prefers to use the qualitative approach and inductive approach here. Qualitative approach uses no numerical data and it consists of observation.  In this research, the researcher will use qualitative research design including mostly observation and exploratory research (Ryan, Scapens, and Theobald, 2002).  Inductive approach is searching for the pattern from observation and the explanation of the theory of those pattern from observation. And that moves toward abstract generalization and idea in relation to capital and revenue expenditure. (Ryan, Scapens, and Theobald, 2002).

There are three cores of qualitative approach which are document analysis, Interviews (including exit interviews), and observations (Yamagata-Lynch, 2010). The first core document analysis is the collection of data from reports, newspapers and various publication where all the collected materials are read and documented and after this descriptive statistics is applied on the collected data. Interviews are done with the help of tape recording of information gathered from the primary and secondary sources. The third core deals with the observation of the interactions within the participants which is recorded through notes and video tapes.

The inductive approach is undertaken with the help of which a new model or structure is prepared. This model is only prepared for the concerned research, therefore, all the structure and model will be new. However, in case of inductive approach, it starts with the observation and theory proposed toward the end research process as a result of the observation

Inductive reasoning is an another name for inductive approach which is done with the help of formation of theories and observations which are proposed at the completion of the process of research and is shown in the form of observations or results. Rich (2017) explained that inductive approach involves the exploration of various patters with the help of observations and explanations of theories which form a series of hypothesis. Thus in an inductive research approach hypothesis are not formed at the beginning of a research.

In inductive research and qualitative research are related in terms of the use of grounded theory. Grounded theories are a concept of social science which involves the formations of theories with the help of collection of methodologies and data analysis (Carlin and Kim 2019).

Qualitative methodology will help in the collection of data and analysis of past researchers theories and models. Three advantages of qualitative methodology are:

  • This methodology has low attraction towards the traditional methods and systems
  • It implements the formation of hypothesis with the implementation of ground theory.
  • This method is comprehensive and detailed.

Three disadvantages of qualitative research are:

  • The reliability of this study on the internal sources can be poor
  • The results developed can be distorted due to weak decisiveness
  • This type of methodology can also lead to poor generalizability.

The inductive approach will support the paper with ideas and theories developed by the author itself. The author will develop these ideas and theories with the help of knowledge and understanding of past authors theories and framework. Three advantages of inductive methodology are:

  • This type of methodology provide flexibility in research
  • This methodology involves the process of learning which is very interesting
  • This methodology is also supportive in predictions and formulation of ideas for any uncertainty.

  Three disadvantages of inductive approach are:

  • This type of research approach is a limited research based on the available resources.
  • This research approach can lead into disoriented conclusion if the observations are wrongly observed.
  • This type of research is incomplete and can lead towards wrong conclusions

3.4 Research Design

There are two other methods researcher will not use in this paper: quantitative and deductive approach. The quantitative approach consists of the numerical data considered to be helpful in case of statistical analysis. (Ryan, Scapens, and Theobald, 2002). The deductive approach is considered with the development of the hypothesis, and then designing the strategy for testing the hypothesis (Burns and Groove, 2014).

The research design is formulated for the purpose of creating a design or a guideline with the help of which the paper can proceed with the collection of the data. The framework selected would determine the sort of data that is useful for the purpose of analysis and the actual outcome with regards to differences between capital expenditure and revenue expenditure can be understood. It is seen that the framework determines the flow of the research and the actual source that can be helpful in the collection of the data (Mohajan, 2018). There are three sorts of designs that are available for utilization and they are namely descriptive, explanatory and exploratory research design. Each of the designs have their traits and merits and the selection of the design is on the topic and the mindset of the researcher. In this paper a critical assessment will be made on capital expenditure and revenue expenditure and the difference between the two would be assessed in order to come out with the actual results. It is due to this fact that exploratory research design has been selected so that explicit explanation and exploration of various sources of data would be made with the help of which extensive data can be attained with the help of which precise and fruitful outcomes can be attained. It is seen that the other two designs can be used for this topic but exploratory will be the most effective one as a comparison is to be made among the two variables and therefore various articles and journals are required to be accessed in order to attain the same.

Chapter 4 Results

4.1 Analysis Procedure

This section of the paper will concentrate on the thematic explanation of the aspects that are related to capital and revenue expenditure and the differences and the comparisons among them. A critical explanation will be made with the help of which an idea can be attained so that the outcome of the paper can be justified.

Preliminary analysis refers to the process with the help of which needs of the research can be understood and the concepts can be understood with the help of which the research would proceed forward.

Thematic analysis is known to be a critical discussion and explanation of the factors and the aspects related to the topic with the help of which proper explanations can be made and better and effective results can be undertaken.

Alternative analysis refers to a substitute process that can be used for this research with the help of which a comparison can be made in order to gain better results.

4.2 Preliminary analysis

The key intention of this analysis is to understand the areas and the concepts on the basis of which evaluation would be made in order to reach the conclusion. The criterions include understanding the concept, gaining idea about the key propositions of the concept and proceed with the analysis with the help of the most effective data for the research.

Capital refers to the important wealth of an organization that is available in the form of properties or resources that can be used in order to produce the further wealth and income. Therefore, such capital goods or properties are available for use as a factor of the production that can be observed from findings of an expert’s statement, “capital meant money investable or invested in business” (Hodgson 2014). Under the capital goods of an organization, other than the financial values or properties, it also includes social capital, human capital, or natural capital, however these capitals are not denominated in the financial terms and that is why it remains away from accounting matter. As provided by the International Accounting Standard Board (2003), Revenue generated by an organization is the cash inflow of advantages during the period emerging in the course of the standard exercises of a venture when those inflows bring about increments in value, other than expands identifying with commitments from value members. Moreover, the term revenue also refers as money received by an organization or governments by selling goods or services or by using the resources of the organization, has been used to make payment of expenses associated with the earning of those incomes. Thus, in metaphorically way, the meaning of capital and revenue can be understood as capital is an entire tree and revenue is its fruits.

4.2.1 Analysis of major concepts of expenditure

The concepts of capital and revenue also possesses significant importance from the viewpoint of taxation, however the objectives and goals of accounting and taxation are different. The main objective associated with the financial accounting of an organization is to provide the necessary financial information to the management as well as other stakeholders associated with such an organization directly or indirectly for example; shareholders, lenders, creditors, suppliers, etc. Therefore, major responsibilities of an accountant under financial accounting are to protect the interests of all these parties by providing the correct and timely information (John and Meyer, 2016). On the other hand, the main aim of taxation system is equitable collection of the revenue wherein the major responsibilities of the official working in taxation system are related with the protection of the public treasury. Therefore, the financial accounting system plays a crucial role in the foundation of the income tax system of an economy that helps the government in maintenance of the good governance. Correspondingly, the system of accounting and the system of taxation consistently incorporate some key issues. The issues of accounting for the most part worry in getting the valuable and pertinent data to partners so as to shape the administrative choice while the issues of taxation partner to guarantee the revenue to the administration, to reallocate the assets by redistribution of salary and to oversee successful financial gadget to hold great nexus among government strategy and social strategy (Your Article Library, 2020). The experts observed in their findings with accounting and taxation analysis that the accounting estimation of pay and costs ought to be reasonable forget the specific measure of benefit or avail-able pay in the taxation. For example, if a substance recorded pretty much revenue it impacts the benefit and misfortune in accounting and available salary in taxation by a similar sum. In this way, it requires understanding the specific idea of capital and revenue receipt and expenditure to get the reasonable estimation of the capital and revenue for the budget summaries and available pay for the taxation (Gary, et al, 2014).

The concepts of capital and revenue related with receipts and expenditures and its resultant profit or income plays a crucial role both from an organization point of view and from the government point of view. When an organization paying tax on its resultant profit or gains during an accounting period, it is the result of the financial accounting done during that period (Dalnial, et al., 2014). As we understood earlier that, the revenue expenditures are accounted in the profit or loss account and capital expenditure become the part of the balance sheet, so proper classification and recognition of expenditure between revenue and capital is very important that ultimately determine the final prof-it or loss for an accounting period on that income tax is computed, which is payable by the organization to the government at specific rate provided. For example, the change of accounting entry by mistake or intentionally of the capital expenditure whenever recorded in the revenue it shrink-age the measure of revenue and benefit while capital receipt whenever recorded in the revenue that acknowledges the benefit. Therefore, the measure of capital increases vacillates in like manner and neither capital additions and misfortune nor revenue benefit and misfortune results the specific measure of these records (Pols 2014).

4.3 Thematic analysis

Thematic analysis is done in order to gain idea about the critical aspect of the research. With the help of this analysis the theme of the paper is identified and thereafter descriptive assessment is made on the topic in order to clarify all the aspects and reach the conclusion. The criterions include recognizing the theme, understanding the context of the research and thereafter critically explaining the information.

4.3.1 Cash Flows and Accounting Income

NPV is reliant on the actual cash flow timing which is contrasting with the process the flow of accounts are managed on the basis of accruals. Accrual accounting refers to the recording of the revenue or the costs when they are measurable and identified irrespective of whether or not the money have been disbursed or attained. For instance, if a craft is sold on credit, the accounting flows will reveal that the revenue from the sales on that day is shown to be the transaction that has been taken place even though the amount has not been received unless billing is completed at the completion of the accounting time.

4.3.2 Incremental Cash Flow Principle

The cash flows that are known to be precise towards the valuation of any project are the incremental cash flows due to the acceptance or undertaking of a project. The incremental cash flows are attributable towards the project and can be forecasted by deducting the cash flows the process would create without the project from the flow of cash that the project would create in case the project is allowed to be undertaken.

The incremental cash flow is considered to be very generic but it is a strong idea that can assist in clarifying any kind of confusing circumstances. Incremental cash flow may have a vital impact on whether to accept or decline any funds for a project and it assists in the determination of the rate of return.

4.3.3 Allocated Costs

These costs are known to be the costs related with the operational activities of a firm as a whole which is apportioned to several kinds of areas of operation and is dependent on a formula. For instance the electricity expenses and the maintenance costs of the common are can be allocated within the several operational areas.

The managers generally dislike the allocated costs over which they do not have any control. Care and supervision needs to be executed at the time of allocating the expenses in order to make sure that the allocations are made precise and accurate.

From the point of view of the principle of ICF, it is known that the costs that are associated to the projects are the real incremental costs that lead to the acceptance of a project.

4.3.4 Excess Capacity

At the time when a project undertakes new requirements for the resources within an organization the opportunity costs of making use of those resources needs to be borne by the project. This is precise and true of the excess capacity.

For instance, an assessment of project is made for expansion of the dining room of a restaurant. The expansion is forecasted as without the expansion the dish machine which is being used needs to be replaced within the next 5 years. In case of expansion the dish machine will end its capacity within 3 years of expansion and hence have to be replaced at that time.

In case of the expansion of the dining room, there would be an opportunity cost related with the purchase of the new dish machine two years prior than the actual time considering the time value of money. As per the principle of ICF, the opportunity cost related with the utilization of the excess capacity of the dish machine needs to be charged with the expansion of the dining room project.

It is observed that even in a potential confusing scenario, things can be managed with ease and properly if the principle of ICF is applied properly.

The above assessment that has been made clearly defines the capital expenditure and the revenue expenditure explicitly. It can be observed that both the aspects have a key role to play in the operational and developmental activities of an organization. Each of the aspects have their own characteristics and are very much alike from each other. The analysis have clearly stated the role of both the expenditure and how these expenditure are managed and handled by the organizations. The organizations need to focus on their short term and long term plans and in the same manner needs to undertake plans and strategies with the help of which both these activities are properly managed and performed and thereby the objectives constructed by an organization can be attained.

Capital refers to the important wealth of an organization that is available in the form of properties or resources that can be used in order to produce the further wealth and income. Therefore, such capital goods or properties are available for use as a factor of the production that can be observed from findings of an expert’s statement, “capital meant money investable or invested in business” (Hodgson 2014). Under the capital goods of an organization, other than the financial values or properties, it also includes social capital, human capital, or natural capital, however these capitals are not denominated in the financial terms and that is why it remains away from accounting matter. As provided by the International Accounting Standard Board (2003), Revenue generated by an organization is the cash inflow of advantages during the period emerging in the course of the standard exercises of a venture when those inflows bring about increments in value, other than expands identifying with commitments from value members. Moreover, the term revenue also refers as money received by an organization or governments by selling goods or services or by using the resources of the organization, has been used to make payment of expenses associated with the earning of those incomes. Thus, in metaphorically way, the meaning of capital and revenue can be understood as capital is an entire tree and revenue is its fruits.

4.3.5 Implementation of taxation and accounting

Researchers found the important distinction between capital and revenue expenditure for the purpose of accounting and taxation wherein he had found that income tax is levied on income and not on capital of an organization or individual. It was found that New Zealand was lacking with clear distinction between the revenue and capital and therefore, it calculates the income of an organization or a person considering the ordinary concepts of the income. It was found that, the revenue, expenditure, and profit of an organization should be same in financial accounting as well as from the taxation point of view, however there could be difference occurred based on the different purposes of different rules and their objectives. Yussof, Isa and Mohdali (2014) stated that, both financial accounting and taxation systems are distinguishing between the capital expenditure and revenue expenditure, because in financial accounting, some items are considered as revenue expenditure while the same has been considered as capital expenditure in case of taxation, however they actually not qualify for the capital allowance. From the financial accounting point of view, all the capital expenditures incurred for acquisition of fixed assets are eligible for depreciation other than land only, and the expenses which are not qualified as capital expenditure would be classified as revenue expenditure (Corporate Finance Institute, 2020).

Capital expenditure has a considerable impact on the profitability of an organization because it impact on the value creation of the organization and therefore it has been considered as the one of the important managerial decisions of the organization. Capital expenditure decision is greater value in terms of capital budgeting management wherein various capital budgeting techniques are used by an organization for effective decision making in relation to a project or venture. Researchers found that any misclassification between the revenue expenditure and capital expenditure can lead to a great impact on the financial statements’ integrity. In case if a revenue expenditure is treated as capital expenditure in the financial statements, then there is likely impact on the profitability of the organization that results into overstatement of profit figure for the given accounting period of the organization and besides that value of assets also overstated on the balance sheet side. In the same way, if the capital expenditure is treated as revenue expenditure, then it results into understatement of the profit of organization for the given accounting period, and value of assets also understated because of this misclassification (Leaning Online, 2020). In outline, the misclassification between a capital and a revenue expenditure will bring about financial statements don’t reasonably speak to the financial situation of any organization. It is for all intents and purposes troublesome at times to draw a line among capital and revenue expenditures since a solitary thing of expenditure can be revenue expenditure and some of the time can be a capital expenditure. Further researchers observed the same point by stating that making distinction between the capital expenditure and revenue expenditure is not entirely clear-cut. For example, the advancement and fixes and support where an improvement is added to the expense of the benefit while upkeep is viewed as work done to keep an advantage in great working condition or to take it back to great working condition if the benefits has separated. The qualification between upkeep costs and improvement is that support keeps the advantage in great condition yet in no better than when it was bought or broadens its valuable life past the first gauge of helpful life. Therefore practically, it is difficult to draw a clear line between these two types of expenditures.

In the recent period of time, there are many technological development occurred that have replaced the requirements of human being to perform the traditional and routine work process in accounting field. Because of increasing demand of financial expertise to complete the need of analysis functions, organizations are using an artificial intelligence technology that works very fast and also cost and time effective. During the period of 90’s NN was the very popular and powerful technique that helps an organization in better classification and recognition of various tasks. NN is made of set of preparing units considered the neurons as it impersonates the human mind. NN can learn and store information by changing the loads related with the neurons associations which can be utilized to tackle a given issue through experience and appropriate training. Researchers had stated that financial statements of an organization are prepared normally at the end of the financial period or accounting period which is normally a calendar year or a financial year, wherein two main financial statements are prepared; one is income statement and second is statement of financial position of the organization. The statement of financial position is a snapshot of the financial position of an organization on the given date wherein all the financial assets and financial liabilities belongs to an organization are provided. Researchers had provided that, the importance of financial statements from the management point of view can be considered in a way that, it helps the management of an organization in taking effective and timely decisions, as well as there are many other outside stakeholders who also dependent upon the financial statements, for example; tax authorities for investigation, potential investors trading in the stock market, financial organization providing loan to the organization, and similar. Researchers had defined the capital expenditure as the amount spent for generation of revenue for long period which is usually more than a year, for example; acquisition of long term assets like building, land, plant and machinery, vehicles, etc. These items of fixed assets are depreciated over their useful life in order to charge the proportionate amount of cost of those assets to the statement of income every year. Capital expenditures are accounted so that it appears on the face of balance sheet of the organization, therefore it doesn’t affect the profit or loss of the organization directly. Researchers had also defined the revenue expenditure as those which are required to be incurred by an organization for the daily running of the business operation. Moreover, he had also added that the expenditure incurred to upkeep the fixed assets in its working condition are also termed as revenue expenditures and such revenue expenditures are directly accounted in the statement of profit or loss without affecting the book value of related fixed assets.

Revenue expenditures are those expenditures which will be consumed during the period of normal operating cycle of an organization (Kevin, 2018). Another perspective on is that revenue expenditure will be expenditure on resources which are expected for transformation into money inside the typical working cycle. Capital expenditure identifies with resources which will stay being used over various accounting periods or which are not planned for transformation into money for the time being. Based on this, it can understand that; capital expenditures help an organization to operate successfully and generate profits (Gary, et al, 2014). So, alternatively this can also be described in a way that capital expenditures improves the capacity of an organization for revenue generation, and revenue expenditure helps in maintenance of the capacity of an organization for revenue generation. Maybe the most ideal approach to comprehend this somewhat hypothetical clarification is to think about various sorts of organizations, and the things on which they cause expenditure (Phil Turtle, 2017). This is significant as every arrangement is accounted for in an alternate way. Revenue expenditure incurred by an organization is reported in income statement and capital expenditure incurred is reported in statement of financial position. A second’s appearance on this will show that erroneous order of expenditure will prompt an error of benefit. For instance, if revenue expenditure is delegated capital expenditure, costs will be downplayed.

In order to charge the proportionate amount of the capital expenditure to income statement, depreciation and amortization has been used. Depreciation is the term used to depict the way toward dispensing a portion of the expenses of non-current advantages for each bookkeeping period. It might be helpful to think about this as charging against benefit the expense of those things which improve the revenue-producing limit of the business (Goyal and Sharma, 2018). There is specific accounting standards are issued by the accounting standard development authorities for accounting of depreciation (Mahmood and Ali, 2015). Accounting standard issued by IASB do not define a single method for computation of amount of depreciation in respect of different assets. Most common methods are in use for computation of depreciation include; straight line of method and reducing balance method and such computed amount of depreciation is charged to income statement for the given accounting period as revenue expenditure for the organization for that particular accounting period. The main difference between the straight line method and reducing balance method is that, straight line method computes depreciation by taking the cost value of fixed assets and reducing balance method computes depreciation by taking net book value of the fixed assets.

4.4 Alternative Analysis

The alternative analysis is conducted by determining some other process with the help of which a comparison and explanation can be made in order to reach an outcome. It has been observed that one of the alternative assessments that can be made with this topic is comparing the financial statements of two or more selected organizations and understanding their capital and revenue expenditure. It is seen that undertaking such an analysis process would narrow down the research and thereby better results can be determined. Each of the companies have their own way of working and handling the capital and the revenue expenditure. Their expenses vary and thereby a comparison of the performance of these companies would identify the significance revenue and capital expenditure have on their performance. The determination of such an analysis would be done on the assessment of the financial statements with the help of which precise and fruitful outcome can be attained.

Chapter 5 Discussion, Conclusion and Further Research

5.1 Theoretical Contributions

This paper has been made to provide the relationship between the capital expenditure and revenue expenditure with the help of various analytical tools and theoretical concepts. The first part of this paper provides an in depth knowledge about the capital expenditure and revenue expenditure. Additionally this part also provides the various advantages and disadvantages of capital and revenue expenditure in business operations. The first part of this paper also provides the audience with the research question, gap and objectives of this research. Thus this paper provides with three research questions which were answered in this paper. The second part of this paper deals with providing the audience as well the author with the theoretical knowledge about the various aspects of expenditure as described in GAAP and IFRS or GAAP or IFRS.  There are there types of expenditure capital expenditure, revenue expenditure and deferred revenue expenditure which are differentiated on the basis there definitions and descriptions given in the GAAP and IFRS or GAAP or IFRS. In order to have a proper understanding about the various aspects of expenditure it important to gain knowledge of financial statements and its purpose in accounting so that the use of expenditure in financial statements can be understood. Thus the theoretical aspects helped in understanding the support of expenditures like revenue and capital in the success of financial statements. The third part of this paper is the methodology where the method used for data collection and analysis are discussed. On the basis of the requirement of the paper it is conclude that the philosophy behind this research is realism. Thus it is discovered that the paper research approach is deductive as the ideas and frameworks of past researchers are been used in this paper. Research design part of methodology helped this paper to form a proper outline with the help of which data required and accurate data are collected for the analysis. Thus the research design of this paper is the exploratory as it helps in defining all the concepts and theories of past researchers on the relationship of capital and revenue expenditure. Thus by building the base of methodology the data collection plan is been formed so that analysis of these data results in the required result. The data for the analysis is collected secondary sources like journals and articles of the past researchers. Some researchers have focused their studies on the explanations given in IFRS while other believed in the explanations and definitions given in GAAP. On the other hand there are some researchers who focused their studies on both the definitions and explanations given in IFRS and GAAP. This paper in its collection of data has not differentiated between any of the research paper. This paper has collected data form all researchers irrespective of their choice of IFRS or GAAP or IFRS and GAAP selection. Additionally from the development of the understanding of capital and revenue expenditure till the present data all the research articles and journals are been collected for analysis. Thus it is concluded that the topic of this research is a generic topic with broad explanation and due to this reason the thematic research analysis tool has been adopted in this paper for the analysis and understanding the relationship between capital and revenue expenditure.  The fourth part of this paper is the analysis where the collected data are analyzed with the help of thematic analysis. This part resulted in two conclusions the theoretical aspect and the managerial contributions which are discussed below.

The above made analysis in relation to capital expenditure versus revenue expenditure provides the detailed discussion with respect to its meaning, classification, determination rules, objectives, advantages and challenges in classification, area of risks involved in the classification, etc. The expenditures incurred by an organization are majorly classified into two broad categories, the first one is capital expenditure and the second one is revenue expenditure. Consideration and treatment of different types of expenditures in financial accounting is very important that is dependent upon its fundamental rules and guidelines. In order to prepare the correct and reliable financial statements of an organization, proper classification and measurement of the expenditures between capital and revenue is very necessary, because misclassification can lead to adverse and wrong results of the financial performance as well as the financial position of the organization shows incorrect position.

5.2 Managerial Implications

There are various stakeholders using the financial statements of an organization including the management and outsider investors, lenders, tax authorities, etc., therefore it is necessary for a business organization to prepare and provide correct and reliable financial statements. Capital expenditures are those that will result into acquisition of permanent or fixed assets in the business organization that is being used continuously for the purpose of generation of revenue. Moreover, any amount being spent by an organization that resulted into improvement in the production or earning capacity or that helps in reduction of cost of production that would also be considered as capital expenditure. So basic understanding of capital expenditure provides that it is an expenditure incurred during an accounting period and the benefits available from such expenditure would be available for more than one accounting period. Normally revenue expenditure refers to the day to day or routine expenditures incurred for regular business operation of the organization. Revenue expenditures incurred by an organization provides benefits for the current accounting period only and therefore all the revenue expenditures are debited to account of trading and profit or loss. Revenue expenditure has its relevance with day to day operational activities of an organization where different types of expenditures required to be incurred by an organization in order to operate it successfully. The common types of revenue expenditures include; amount spent on repair and maintenance expenditures, general and administrative expenditures, selling and distribution expenditures, etc. Revenue expenditure is also known as operational or income statement expenditure. Other than capital and revenue expenditures, a third form of expenditure exists in between these two broad categories; is deferred revenue expenditure. This type of expenditure basically large in amount and most important the benefits associated with this expenditure are not consumed within an accounting period in which it is incurred. In order to match the revenue concepts attached with this type of expenditure, part of the amount is charged to the income statement of an accounting period and such amount is reduced from the total amount of expenditure to obtain the balance amount that would be shown on the face of statement of financial position as an asset which is actually a fictitious asset and not a real asset. Capital expenditure refers to the amount spent by an organization for acquisition of long-term assets for start of business operation. Capital expenditures contrast with the revenue expenditure, because revenue expenditure has been incurred by an organization to fulfill the short-term needs of the business operation. There are various objectives associated with the capital expenditure, such as; business growth in long period, acquisition of the new assets, improvement of the existing equipment, investment in new property, etc. The main objective of revenue expenditure incurred is to maintain the earning capacity of an organization and also maintain the working efficiency of the non-current assets maintained by organization through capital expenditure. Revenue expenditure is caused for gaining stock for resale either in its unique or improved structure. There are various objectives associated with the revenue expenditures, such as; maintaining the revenue earning capacity of the organization, generation of revenue, maintain the matching concept of the accounting, etc. The managers in the organization are facing more challenges while taking the decisions related to capital expenditures because it involves investment of huge amount of fund over several years’ time. Importance of capital expenditure can be understand from various points such as, long-term effects, irreversibility, high level of initial costs, depreciation provision, etc. On the other hand importance of revenue expenditure include, decision of when and what to buy, cash flow maintenance, building of appropriate markets for the products or services in which the organization is dealing, managing credit of the organization, etc. The various challenges discussed in relation to decisions taken for capital expenditure include; measurement problems, uncertainty in relation to return on investment, temporal spread, future earnings, legal compulsions, intangible factors, etc. and for revenue expenditure include; maintenance of short-term cash liquidity, understand the cost-revenue structure of the organization, management of interdepartmental conflicts, decisions making at departmental level, back to the business plan, and easy savings.

The outcome of the paper has led to creation of an idea with the help of which the difference between capital expenditure and revenue expenditure can be determined. It is due to this fact that certain recommendations can be made with the help of which the research can be improved further. It is recommended that proper assessment and control is made with respect to capital and revenue expenditure in an organization so that segregation of the two expenses can be done properly and proper resource utilization can be done. It is even recommended that the firms give proper priority to both the expenditure and maintain a budget for the same with the help of which these activities can be smoothly executed and the performance and the goals of the firms can be enhanced. Meetings should be conducted so that these expenditure can be looked upon and any kind of issues that are existent within a business in relation to capital and revenue expenditure can be mitigated.

5.3 Limitations and Future Research

In this research, the researcher has considered only two types of expenditures i.e. the revenue and capital. However, it is important that the thirds type of expenditure i.e. deferred expenditure be also considered and explored as that also has impact on expenditure. It is important to understand that accounting and taxation are considered to be important at present.  However, it tends to get complicated due to revenue and capital expenditures.  Even the availability of literatures on capital and revenue are considered to be limited. The limitation of time has been an essential factor and therefore available of more time would have given better results. The topic on which the paper has been prepared is a vast one with a generic point of view and therefore specification of a distinct area on the basis of the topic would have created a much better outcome. There is ample scope for further research because as per the topic certain new principles can be generated with the advent of time with the help of which capital and revenue expenditure estimations and calculations may change. In such a circumstances comparison with the current research can be undertaken with the help of which the changes that have taken place can be known. 

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