Capital expenditure vs revenue expenditure
Capital expenditure vs revenue expenditure is the classification test behind every cost: capital expenditure is capitalised as an asset and depreciated, while revenue expenditure is expensed immediately.
See it move
A haulage company spends €15,000 replacing a truck's engine, extending its useful life by four years — capital expenditure, capitalised and depreciated going forward. The same truck's €1,200 routine service and oil change is revenue expenditure, expensed immediately because it merely keeps the truck running rather than improving or extending it.
Check yourself
A company spends €40,000 upgrading a machine in a way that extends its useful remaining life by 5 years, and separately spends €6,000 on routine maintenance for the same machine during the year. It correctly capitalises the €40,000 upgrade and depreciates it over the extended 5-year life on a straight-line basis, with no residual value. If, instead, the accountant had wrongly expensed the entire €40,000 immediately, by how much would this year's reported profit be understated compared with the correct treatment?