They’re easy mistakes to make, but they can have serious unintended consequences for your business. The income of future periods will be overstated because no depreciation expense is recorded in these years. The current period’s income will be understated because the entire expenditure was expensed when only a portion of it (i.e., the current year’s depreciation) should have been expensed. In accounting, the term expenditure refers to the payment of an asset or the incurrence of liability in exchange for another asset or service rendered. Examples of these classifications are administrative expenses, compensation, research and development, property taxes, travel, and utilities. In other words, the expenses reduce profit from a tax standpoint, and thus, reduce the taxable income for the tax period.
J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. A professional writer for many years, Agata specializes in writing articles and blogs focused on finance as someone who holds a Master’s Degree in Accounting and Finance.
What is capital expenditure?
The following diagram illustrates the difference between capital and revenue expenditures. Capital expenditures are charged to expense gradually via depreciation, and over a long period of time. Depending on the asset, depreciation charges could extend out for more than a decade. Revenue expenditures are charged to expense in the current period, or shortly thereafter. Companies often use debt financing or equity financing to cover the substantial costs involved in acquiring major assets for expanding their business.
- An item of expenditure for which the benefit expires within the year is classed as revenue expenditure.
- After this, they will bear no further effect on your expenses, unless they recur, in which case each separate recurrence is expensed separately.
- 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.
- If Company B has to spend $400 per month on raw materials for its production line, then that $400 counts as a revenue expenditure for that month as it documents cost of the asset.
Examples of capital expenditure include purchasing or improving the property, buying new equipment or technology, and investing in research and development. Businesses need to decide what model each expense would fall into, fully knowing the trade-offs. Sometimes the answer is quite obvious, while the line between the two is blurred in some cases.
How to account for Capital Expenditure and Revenue Expenditure
Classifying the expenses properly will save you a lot of trouble during tax time, while showing a strong financial statement. In other words, these are the costs related to assets that are not capitalized because they do not provide benefits extending beyond the current year. They are incurred because of an asset, but don’t provide additional value or extend the useful life of the asset. Getting this wrong could involve looping in financial analysts to fix and heft legal expenses in the long run. Keeping track of your costs correctly will tell you where you’re spending too much and allow you to assess where money is being spent effectively. 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 Expenditure refers to an expenditure that gives rise to the acquisition of a non-current asset. Examples of Capital Expenditure include the purchase of a new machine, a building or a delivery truck. Revenue expenditure refers to an expenditure incurred for rendering a service and does not result in the acquisition of another asset. Similarly if we do some expenditure and that can increase the capacity or capability of any vehicle then that expense would be considered as Capital expenditure. Capital and revenue expenditures are not the same, despite both involving company expenses.
What is the difference between Revenue Account and Capital Account?
Although the day-to-day operations of a successful business don’t always bring up technical accounting terminology, there are some terms you’ll want to be on the lookout for. For example, revenue expenditure and capital expenditure might sound the same, but they are different. Revenue expenditures are usually less expensive than capital expenditures, small enough to be expensed against a shorter revenue period.
Though it’s possible for a larger expense to become a revenue expenditure, it’s only possible if they are useful for a short time. Capital expenditure (or CapEx) refers to the funds used by a business to acquire, maintain, and upgrade fixed assets. These might include Plants, Property, and Equipment (PP&E) like buildings, machinery, and office infrastructure.
Capital Expenditures vs. Revenue Expenditures: An Overview
Learn about the different types and how they’re different from capital expenditure to get your revenue accounting done right. Capital Expenditure refers to purchase of equipment which cannot be used immediately. For example, the labor cost to adjust a new machine during installation is considered a capital expenditure and, therefore, forms part of the acquisition cost of the machine. Clearly, the purchase of a delivery truck is a capital expenditure, whereas an engine tune-up is a revenue expenditure. Now, if you add a few more units to the storage area, it would be considered CapEx as it provides additional value to the asset.
Why You Can Trust Finance Strategists
The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. When you’re running your SaaS business, dealing with a huge glossary of financial terms daily, it’s to be expected that you might occasionally get two terms with similar meanings mixed up. You might confuse your deferred revenue with your fulfilled revenue or with your backlog, for instance.
