Capital Expenditures vs. Revenue Expenditures: Key Differences and Impacts

Understanding Capital Expenditures and Revenue Expenditures

Capital expenditures (CapEx) are long-term investments that a company makes in fixed assets, such as buildings, machinery, or equipment, to fuel its growth. Revenue expenditures (OpEx), on the other hand, cover the daily operating costs needed to run the business, like wages, utilities, and maintenance.

CapEx is recorded as an asset and amortized or depreciated over time, influencing long-term financial health, while OpEx is expensed immediately, which affects current profits and tax liabilities.

Learn more about the critical differences between capital expenditures and revenue expenditures, their impact on business growth, and how they’re accounted for in financial statements.

Exploring Capital Expenditures

Capital expenditures (CapEx) 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.

Key Capital Expenditure Examples

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 (OpEx) 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.

How Capital Expenditures Are Accounted for

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, it must show the cash outflow on its 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 that 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.

Exploring 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 (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. These expenses 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 examples of revenue expenditures include the following:

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 that the expenses occur. In other words, the expenses reduce profit from a tax standpoint, and thus reduce the taxable income for the tax period.

Illustration of Capital Expenditures vs. 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 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.

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.

The Bottom Line

Capital expenditures (CapEx) and revenue expenditures differ in their time horizon and accounting treatment. While CapEx involves long-term spending on assets that provide future benefits, revenue expenditures (also called OpEx) cover short-term operating costs essential for daily business activities.

CapEx appears on the balance sheet and is gradually depreciated or amortized, whereas OpEx is recorded on the income statement and deducted immediately, which reduces current profits. Investors and other key stakeholders can use these figures to analyze a company’s financial health and long-term investment strategy.