Types of Expenditure

Expenditure is the act of spending funds on various corporate expenses. However, in general, spending money to purchase something is called expenditure. For instance, you pay an amount to buy machinery or certain essentials, etc.

You may make the entire purchase in instalments or by paying at once, all those will be considered under expenses. Nevertheless, for Commerce students, the expenditure meaning in accounting is to be considered.

Here is a brief explanation of all the types of expenses with their examples for a holistic understanding.

What is Expenditure in Accounting Terms?

In terms of accounting, expenditure is a disbursement or a payment made towards a different entity. You have to understand that expenditure may be paid towards your liabilities. 

Therefore, expenditure in accounting does not necessarily mean payment for gaining something in exchange. However, there might be instances where you are purchasing an asset for your company or business. In such cases, you will be the owner of the purchase that you make.

Students have to develop a clear understanding with the help of expenditure examples of such terminologies and be able to differentiate between regular definition and specific definition with respect to Commerce. 

What is Revenue Expenditure?

It is one of the types of expenditure, wherein the Central Government spends money with an aim to create fixed assets. In simple words, it is an expenditure to keep the assets in functioning condition regularly.

Let us Understand the Concept with the Help of a Simple Example.

Suppose, you own a tyre company and to expand your business, you recently bought a piece of machinery that cuts out pieces of tyres in equal measurements. The machine cost you Rs. 1,36,000. On regular operation, you found the machine costs Rs.5,700 monthly expenditure towards its maintenance.

Here, the amount incurred in keeping the machine in working condition is Rs.5,700 and this amount is called the expenditure towards making revenue. 

In further simpler words, an expense that is likely to bring revenue is called revenue expenditure.

Consider this case, the machinery is supposed to increase productivity and thereby increase sales and generate revenue. To keep it functioning, an expense is incurred towards its regular repairing and save it from wear and tear.

What is a Capital Expenditure?

Capital expenditure is one of the two different types of expenditure. This kind of expense is incurred by a company to upgrade or expand its business operations. Often this expense is related to acquiring fixed assets that are likely to be productive in the long term.

The primary aim of capital expenditure is to enhance the overall efficiency or capability of a business.  Let us further understand this concept with a small example.

Again, you have a tyre manufacturing company, and you already have the equipment to produce different sizes of tyres. However, lately, you have purchased other equipment that will enhance the longevity of the previously present pieces of equipment. 

In such a case, the cost incurred in purchasing the new equipment to enhance the efficiency of old equipment is the capital expenditure. 

Students should also understand the types of capital expenditure, which are classified into two types -

• An expense meant for maintaining the operational level within the organisation.

• An expense which will facilitate an increase in growth of the company in future.

Commerce students need to develop clarity on both these types of expenditure so as to classify them and determine a company’s expenses rightfully. 

How Does Revenue Expenditure Differ from Capital Expenditure?

Both capital expenditure and revenue expenditure are two different types of expenses incurred while running a business. Although the primary objective is the overall growth of a business, it is their specific purposes that separate them from each other. 

The former is incurred when purchasing a piece of equipment or machinery to upgrade the working condition of a company. Contrarily, the latter is incurred in an organisation when there is a need for funds to keep the equipment functioning effectively that are likely to be productive over the years.

To check your preparation level, you need to revise the lessons as well as take necessary challenges and short tests at times. Here is a short quiz that will help you test your knowledge learnt so far.

Taking this quiz will allow you to think deeply about each example and classify them into expenses under capital or revenue. 

Quiz:

Classify the following under the categories of capital and revenue expenditure.

Rent, office equipment, carriage on saleable goods, Furniture and fixtures, salaries, wages manufacturing expenses, vehicles, commission, buildings, legal expenses, land,  insurance, computer equipment, advertisement, machinery, free samples, postage, printing charges, software.

Answer:

Once you have understood the classification of expenditure, it will be easier for you to delve into advanced concepts as well. Listing these expenses on a balance sheet or drafting a report for a business will help you ease your job significantly in the long run if you take up accounts in your higher studies.

For more information on expenditure, its types and its role in a detailed manner, you can take help from our online learning programmes. Our study materials and notes of important topics drafted by subject experts to help you develop a clear understanding of the same. So, get your notes from us now and add an extra edge to the competition.