Capital expenditure refers to the spending by a company in the acquisition or improvement of long-term assets. On the other hand, revenue expenditure refers to the expenses that a company incurs in undertakings that do not extend or improve the life of an asset. The distinction between capital and revenue expenditure is crucial concerning the evaluation of an organization’s expenses on fixed assets. Of the two assets, only capital expenditure affects an organization’s fixed assets (Weygandt et al., 2009). The short-term benefits derived from revenue expenditure only warrants its inclusion in income statements.
Depreciation refers to the decline in the worth of an asset over the estimated useful life of the asset. Several factors determine the annual depreciation for a depreciable asset. These include the initial recorded cost, estimates on salvage value, estimates on useful life and the depreciation method. Depending on the factor in question, the determination of depreciation may be objective or based on judgment. Recorded costs are mostly determined using the objective approach. However, aspects such as cost assignments require considerable judgment. The salve value requires an evaluation of the estimates realizable upon the end of an asset’s useful life (Weygandt et al., 2009). These estimates incorporate aspects of judgment. The analysis of useful life entails the selection of the measure of service life and estimation of the units embodied in an asset. This requires judgment. The selection of the depreciation method employs judgment. However, its application may entail an objectively derived formula.
Depreciation expenses and accumulated depreciation do not entail any aspects relating to cash. Thus, although depreciation affects the recording of the net income in the income statement, it does not result in any deductions relating to the cash account on a balance sheet (Weygandt et al., 2009). The preparation of the statement of cash flows requires considerations on the net income. Therefore, there is the need to adjust records on net income to avoid the reduction of depreciation expenses.