Spending on machinery is an example of capital expenditure

Capital expenditure refers to business spending on non-current assets or capital equipment of a business. It is regarded expenditure on the long-term investment of an organization on assets that offer gains in efficiency and productivity. Capital expenditure results in an increase in the earning capacity of the business. Examples includes spending on:

The finance to fund capital expenditure is normally from long term sources of finance (more than 12 months from the balance sheet date or the firm's accounting period). Greater capital expenditure enables a business to pursue its growth and evolution. For example, Tesla, the electric car manufacturer, has spent billions of dollars in the past decade in its strive to gain market share.

Tesla’s capital expenditure 2008 – 2017 (USD billion):

Source: www.statista.com

 Watch this 5-minutes video from Business Insider that shows what is meant by capital expenditure and its importance to large companies such as Ben & Jerry’s. The video features one of Ben & Jerry's ice cream factories, which relies on significant capital expenditure on ice-cream making machines in order to produce the  high level of output needed to satisfy demand for its products (nearly a million pints each day!)

Wages and salaries paid to employees are an example of revenue expenditure

Revenue expenditure refers to business spending on its everyday and regular operations. These expenses have to be paid in order to keep the business operational, including routine expenditure on maintaining the firm's non-current assets. Examples include expenditure on:

• Stocks of raw materials, components (semi-finished goods) and finished goods which as ready for sale, paid to suppliers

• Delivery costs

• Utility bills (e.g. gas, electricity, water and telephone bills)

• Wages and salaries to employees

• Rental payments for the premises

• Monthly repayments on bank loans and mortgages

• Insurance premiums (for example, insurance cover for buildings, employee safety and vehicles).

Shipping and delivery costs are examples of revenue expenditure

If a firm lacks the finance to be able to fund revenue expenditure, it will become insolvent and therefore go out of business. Staff will refuse to work if they are not paid, suppliers will stop providing stocks to the business, and utilities companies will disconnect their services. The finance to fund revenue expenditure normally comes from short term sources of finance.

Table 1 - Summary of the differences between revenue and capital expenditure

Have a go at this quiz to test your understanding of the different examples of revenue expenditure and capital expenditure.