the distinction between capital expenditure and revenue expenditure
5.1 Business Finance – Working Capital
What is Working Capital?
Working capital is the money a company uses to run its day‑to‑day operations. Think of it as the cash that keeps the business moving – paying suppliers, covering wages, and buying inventory.
Formula (in LaTeX): $WC = A_c - L_c$ where $A_c$ = current assets and $L_c$ = current liabilities.
Capital Expenditure (CapEx) vs Revenue Expenditure (RevEx)
CapEx and RevEx are two types of costs a business incurs. They differ in purpose, duration, and how they appear on the financial statements.
- Capital Expenditure (CapEx) – Money spent on assets that will benefit the company for many years. 🚗 Analogy: Buying a car.
- Revenue Expenditure (RevEx) – Money spent on items that are used up within a year. ⛽ Analogy: Buying petrol.
Key differences:
- CapEx is recorded as an asset on the balance sheet and depreciated over time.
- RevEx is recorded as an expense on the income statement immediately.
- CapEx usually involves large, one‑off payments; RevEx is recurring.
Examples of CapEx and RevEx
| Expense Type | Example | Duration |
|---|---|---|
| CapEx | Purchase of a new production machine | 5–10 years |
| RevEx | Monthly rent for office space | 1 year (renewable) |
| CapEx | Construction of a new warehouse | 15–20 years |
| RevEx | Utilities (electricity, water) | 1 year (renewable) |
Exam Tips 📚
Define clearly: Start with a concise definition of CapEx and RevEx.
Use examples: Show at least two examples for each type.
Explain the impact: Mention how each appears on the financial statements.
Analogy helps: A simple analogy (car vs petrol) can make your answer memorable.
Check word limits: Keep answers to the point – A‑Level exams favour clarity over length.
Revision
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