Revenue And Capital Expenditure

Most of our items of daily expenditure consist, in number if not in value, of purchases of consumer goods and services. By consumer goods we mean goods that are completely used up in one go, such as food and drink, bus fares, chocolate, petrol and hairdos, visits to the cinema or football matches. We pay for these out of our current income or revenue, for which reason such items of expenditure may be termed 'revenue expenditure'. On the other hand, some of the things we buy, although usually classified as consumer goods, are not used up immediately, but gradually over a comparatively short period of years. These include clothing, shoes, some toys and sports equipment - things that wear out comparatively quickly.

Capital goods

At the other extreme we also spend money on capital goods. The classic example of capital goods is land. Land never wears out and never needs replacing, yet it yields a benefit to its owner in perpetuity. The biggest item of capital expenditure that most of us ever make is the purchase of a house and garden. The house itself, although it will not last for ever, is likely to preserve its value at least for a lifetime, yielding a continuous supply of utility to the owner in the form of shelter, warmth and comfort.

Domestic capital expenditure

Other examples of capital expenditure are purchases of carpets, furniture and fittings for the home, TV and radio sets, cars, washing machines, dishwashers, refrigerators, music centres and cameras. The purchase of any of these is an investment in a productive capital asset - productive in the sense that its use will produce not an income over a period of time, but a stream of utilities. Such assets are often called 'consumer durables' because they share the qualities of both consumer goods and capital goods.

Like most capital assets such goods depreciate over time, and their useful life is limited to a fairly short period of years, at the end of which they become valueless or of scrap value only, and have to be replaced. Over the long term, therefore, a wise individual will make provision for replacing them as they wear out, setting aside regular savings from income to meet the eventual cost.

• Personal Expenditure Budgeting
• House Buying Example