Capital expenditure is money spent by a business to acquire or improve a fixed asset — something that will be used for more than one accounting year.

Characteristics of Capital Expenditure

• Increases the value of a fixed asset or adds a new fixed asset
• Benefits the business for several years (long-term benefit)
• Recorded in the balance sheet as a non-current asset
• Examples include:
  • Buying machinery, vehicles, or equipment
  • Constructing or purchasing buildings
  • Legal fees paid when buying property
  • Transport costs to bring machinery to the business
  • Cost of improvements that extend an asset's useful life

Why It Matters

Capital expenditure is not charged immediately to the income statement. Instead, it is recorded as an asset on the balance sheet. The cost is then spread over the asset's useful life through depreciation.

Revenue expenditure is money spent on the day-to-day running of the business. It does not increase the value of fixed assets.

Characteristics of Revenue Expenditure

• Used up within the current accounting period (short-term benefit)
• Maintains the business operations rather than improving assets
• Recorded as an expense in the income statement
• Examples include:
  • Petrol and fuel for vehicles
  • Routine repairs and maintenance
  • Electricity bills
  • Wages and salaries
  • Office supplies

On the Balance Sheet

• Capital expenditure increases non-current assets
• The asset appears at its full cost (or improved value)

On the Income Statement

• Revenue expenditure appears as an expense
• It reduces the profit for the period
• Capital expenditure does not appear here directly (only through depreciation over time)

This difference matters because it affects whether profit appears higher or lower in a given year.

Mwanajuma operates a small printing shop in Dar es Salaam. During the year, she made the following payments:

1. TSh 8,500,000 — Purchased a new printing machine
2. TSh 150,000 — Paid for repairs to the old printing machine
3. TSh 75,000 — Bought ink and paper for daily printing
4. TSh 1,200,000 — Installed a new roof on the workshop building

Analysis:

Effect on financial statements:

• The printing machine (TSh 8,500,000) and roof (TSh 1,200,000) will be shown as non-current assets on the balance sheet.
• Repairs (TSh 150,000) and ink/paper (TSh 75,000) will be recorded as expenses in the income statement, reducing profit for the year.

• Capital expenditure creates or adds value to a fixed asset; it is recorded in the balance sheet and benefits the business for multiple years.
• Revenue expenditure keeps the business running day-to-day; it is recorded in the income statement and benefits only the current period.

Understanding this difference ensures that financial statements show a true picture of the business — assets are not overstated, and expenses are not hidden.

In Tanzania, small business owners like market vendors in Kariakoo or restaurant owners in Arusha apply this concept when deciding whether to record a purchase as an asset or an expense. For example, buying a new fridge for a restaurant is capital expenditure (recorded as an asset), while paying for monthly electricity is revenue expenditure (recorded as an expense). This affects how much profit the business reports and helps the owner make better financial decisions.