Capital Expenditures vs. Revenue Expenditures: An Overview
The differences between capital expenditures and revenue expenditures include whether the purchases will be used over the long-term or short-term. Capital expenditures (CAPEX) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment. Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period.
Revenue expenditures are typically referred to as ongoing operating expenses, which are short-term expenses that are used in running the daily business operations.
- Capital expenditures (CAPEX) are funds used by a company to acquire, upgrade, and maintain physical assets such as equipment.
- Capital expenditures are typically one-time large purchases of fixed assets that will be used for revenue generation over a longer period.
- Revenue expenditures are the ongoing operating expenses, which are short-term expenses used to run the daily business operations.
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 (OPEX).
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 useful life of the asset. Revenue expenses 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 examples of revenue expenditures include the following:
- Salaries and employee wages
- Any overhead expense, such as salaries for the corporate office, which typically fall under selling, general, and administrative expenses (SG&A)
- 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 income statement. These expenses are subtracted from the revenue that a company generates from sales to eventually arrive at the net income or profit for the period.
Revenue expenses can be fully 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.
Capital expenditures represent significant investments of capital that a company makes to maintain or, more often, to expand its business and generate additional profits. Capital expenditures consist of the purchase of long-term assets, which are assets that last for more than one year but typically have a useful life of many years.
Capital expenditures are often used for buying 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 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
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 running the day-to-day business and the maintenance costs that are necessary to keep the asset in working order.
Companies often use debt financing or 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 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 improvements.
CAPEX Accounting Treatment
The purchases or cash outflows for capital expenditures are shown in the investing section of the 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 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 depreciation over the useful life of the asset. In other words, the cost of capital expenditures are spread out over many periods or years, whereas revenue expenditures are expensed in the current year or period.
While keeping operating expenses under control can boost profit in the short-term, CAPEX spending can grow revenue in the long-term.
Example of Capital and Revenue Expenditures
Tesla Inc. (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.
As stated earlier, revenue expenditures or operating expenses are reported on the income statement, which are highlighted in blue below.
- Total operating expenses for Tesla were $940 million for Q2 2020.
- The Q2 2020 revenue expenditures decreased from $1.088 billion that was 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 cash outflows for CAPEX are shown in the investing section of the cash flow statement.
- Total capital expenditures for Tesla were $1.046 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 $1.001 billion in purchases of property and equipment as well as $46 million in purchases of solar energy systems.