Capital Expenditures vs.

Revenue Expenditures:
What's the Difference?
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Capital Expenditures vs. Revenue Expenditures: 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 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 equipment.
Revenue expenditures, on the 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.

Key Takeaways

Capital expenditures 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.

Capital Expenditures
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 long-term assets, which are assets that last for more than one
year but typically have a 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 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

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 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 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 is 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.

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 useful life of the asset. These expenses that are related to existing assets include

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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.

Companies can use expense management automation to help keep track of certain
spending, including business travel. These programs can also help management
reimburse employees.

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, 2020.1

Capital Expenditures
The cash outflows 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.

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 Image by Sabrina Jiang © Investopedia 2020

Revenue Expenditures
As stated earlier, 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.

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 Image by Sabrina Jiang © Investopedia 2020

Are Capital Expenditures and Revenue Expenditures the Same

Thing?
Capital expenditures and revenue expenditures are two types of spending that
businesses have to keep their operations going. But they are inherently different.

A capital expenditure refers to any money spent by a business for expenses that will be
used in the long term while revenue expenditures are used for short-term expenses.

For instance, a company's capital expenditures include things like equipment, property,
vehicles, and computers. Revenue expenditures, on the other hand, may include things
like rent, employee wages, and property taxes.

Is CapEx the Same As Fixed Assets?

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No. CapEx or capital expenditures and fixed assets are not the same thing. However, a
company's CapEx is used to purchase fixed assets. These assets are generally meant for
the long term (generally longer than a year) and include property, equipment, and
vehicles. Some industries, such as the telecommunication sector and the oil/gas industry,
have higher CapEx spending.

What Are Some Examples of Revenue Expenditures?

The term revenue expenditures refers to any money spent by a business that covers
short-term expenses. This means the money is used for expenses that are used within
one year. Some examples of revenue expenditures include rent, property taxes, utilities,
and employee salaries.

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 to revenue generation.

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