Capital Expenditures vs. Revenue💝 Exp🦋enditures: An Overview

Capital expenditures and revenue expenditures refer to money spent by companies to keep their day-to-day operations going. But there are some differences between these two, including how they're used—whether that's to make purchases for the short or long term.

Capital expenditures (CapEx) are funds used for one-time large purchases of 澳洲幸运5官方开奖结果体彩网:fixed assets that will be used for revenue generation over a longer period. This could be to acquire, upgrade, and maintain physical assets such as property, buildings, or equipm🌌ent. Revenue expenditures, on th♓e other hand, are typically referred to as ongoing operating expenses (OpEx), which are short-term expenses that are used in running the daily business operations.

Capital Expenditures

澳洲幸运5官方开奖结果体彩网:Capital expenditures represent significant investments of capital that a company makes to maintain or, more often, to expand its business and generate additional profits. CapEx consists of the purchase of 澳洲幸运5官方开奖结果体彩网:long-term assets, which are assets that last for more than one year but typically have a 澳洲幸运5官方开奖结果体彩网:useful life of many years.

This type of spending is often used to buy fixed assets, which are physical assets such as equipment. As a result, capital expenditures are typically for larger amounts than revenue expenditures. However, there are exceptions when large asset purchases are consumed in the short term or the current 澳洲幸运5官方开奖结果体彩网:accounting period. 

Types of Capital Expenditures

Capital expenditures can include the purchase of🌼 the following:

• A facility or factory, including an upgrade or expansion
• Vehicles, such as trucks used for the delivery of products
• Manufacturing equipment
• Computers
• Furniture

Capital expenditures are often used to undertake new projects or investments by a company. Typically, the purpose of CapEx is to expand a company's ability to generate revenue and earnings. Conversely, revenue expenditures are the operational expenses for run𒆙ning the day-to-day business and the maintenance costs that are necessary to keep the asset in ♌working order.

Companies often use 澳洲幸运5官方开奖结果体彩网:debt financing or 澳洲幸运5官方开奖结果体彩网:equity financing to cover the substantial costs involved in acquiring major assets for expanding their business. Debt financing can involve borrowing money from a bank or issuing 澳洲幸运5官方开奖结果体彩网:corporate bonds, which are IOUs to investors who buy them and get paid interest periodically. Equity financing involves issuing shares of stock or equity to investors to raise funds for expansion and capital improv𒈔e🔜ments.

CapEx Accounting Treatment

The purchases or cash outflows for capital expenditures are shown in the investing section of the 澳洲幸运5官方开奖结果体彩网:cash flow statement (CFS). The CFS shows all of the inflows and outflows of cash in a particular period. When a company buys equipment, for example, they must show the cash outflow on their CFS. In addition, the equipment must also be recorded within total assets on the 澳洲幸运5官方开奖结果体彩网:balance sheet.

Since long-term assets provide income-generating value for a company for a period of years, companies are not allowed to deduct the full cost of the asset in the year the expense is incurred. Instead, they must recover the cost through year-by-year 澳洲幸运5官方开奖结果体彩网:depreciation over the 澳洲幸运5官方开奖结果体彩网:useful life of the asset.

In🍸 other words, the cost of capital expenditures is spread out over many periods or years, whereas revenue expenditures are expensed in the current year or period.

Revenue Expenditures

Revenue expenditures are short-term expenses used in the current period or typically within one year. Revenue expenditures include the expenses required to meet the ongoing operational costs of running a business and thus are essentially the same as operating expenses.

Revenue expenditures also include the ordinary repair and maintenance costs that are necessary to keep an asset in working order without substantially improving or extending the 澳洲幸运5官方开奖结果体彩网:useful life of the asset. These exp⛄enses that are related to existing assets include repairs and regular maintenance as well as repainting and renewal expenses. Revenue expenditures can be considered to be recurring expenses in contrast to the one-off nature of most capital expenditures.

Types of Revenue Expenditures

Other exampꦇles of revenue expenditures include the f൩ollowing:

• Salaries and employee wages
• Any overhead expense, such as salaries for the corporate office, which typically fall under sell♒ing, general, and administrative expenses (SG&A)
• 澳洲幸运5官方开奖结果体彩网:Research and development (R&D)
• Utilities and rent
• Business travel
• Property taxes

Revenue Expenditures Accounting Treatment

Revenue expenditures or operating expenses are recorded on the 澳洲幸运5官方开奖结果体彩网:income statement. These expenses are subtracted from the revenue that a company generates from sales to eventually arrive at the 澳洲幸运5官方开奖结果体彩网:net income or profit for the period.

Revenue expenses can be fully 澳洲幸运5官方开奖结果体彩网:tax-deducted in the same year the expenses occur. In other words, the expenses reduce profit from a tax standpoint, and thus, reduce the taxable income for the tax period.

Example of Capital and Revenue Expenditures

Tesla (TSLA) is an automobile manufacturer of electric vehicles. Below is a truncated portion of the company's income statement and cash flow statement as of the company's 10-Q report filed on June 30, 2020.

Capital Expenditures

The cash outf🐎lows for CapEx are shown in the investing section of the cash flow statement.

• Total capital expenditures for Tesla were $1.05 billion for Q2 2020.
• The Q2 2020 CapEx figure was an increase from $547 million reported in Q2 2019.
• We can see that the increase was the result of $1 billion in purchases of property and equipment as well as $46 million in purchases of solar energy systems.

Revenue Expenditures

As stated earli🐬er, revenue expenditures or operating expenses are reported on the income statement, which is highlighted in blue below.

• Total operating expenses for Tesla were $940 million for Q2 2020.
• The Q2 2020 revenue expenditures decreased from $1.09 billion reported in Q2 2019.
• We can also see that the $148 million reduction in OpEx ($1,088 - $940), in 2020 directly helped the company's net income for that quarter, in which a $327 million net income gain was recorded.

The Bottom Line

Companies need to spend money in order to make money. Business expenses can come in different forms. Short-term expenses are referred to as revenue expenditures while expenses made for long-term assets are called capital expenditures. Revenue expenditures are commonly used to keep the day-to-day operations going while CapEx contributes t♋o revenue generation.