Accounting is a business function where companies record transactions relating to their operations. Accounting rules require companies to follow specific standards and record information a certain way to accurately represent transactions. Recording capital and revenue expenditures are an example of these standards.
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Capital expenditures are purchases a company will make that result in an addition or replacement of an asset. These assets are typically long-term items the company will use to generate sales. Revenue expenditures relate to money spent maintaining the company’s operating facilities and equipment.
Capital expenditures affect balance sheet accounts and can increase the economic wealth of a company. Revenue expenditures are typically classified as expenses, meaning they go against the income a company generates during an accounting period.
Keeping these two items separate and correctly classified in the company’s accounting books is important. Companies that record revenue expenditures as assets will create a distortion in their accounting figures, resulting in the fraudulent increase of net income.
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