A company must consider its expenditures to manage and generate sustainable income effectively. The most important of them are capital and income expenditures. In the article, you can find out what capital and revenue expenditures are and how they differ. We will also explain their importance for business and write two suitable examples of capital expenditure and revenue expenditure.
Capital expenditure, or CAPEX, is a company’s funds to buy, maintain, and upgrade its physical assets, such as buildings, equipment, or furniture. As a rule, these are significant one-time expenses for purchasing fixed assets that will be used to generate income over a long period. Fixed assets serve more than one year; that is, they have a useful life of several years and even decades.
A company makes capital expenditures to maintain or expand its business. In the long run, this will bring additional income.
Formula of capital expenditure
Capital expenditure has been helping to increase the overall performance of a company over the years. CAPEX is calculated using the following formula:
Capital expenditure = Net increase in PP & E + Depreciation Expense
Note that capital expenditures are capitalized. They are also depreciated each year. This is one of the main differences between capital and revenue expenditures.
Types of capital expenditures
Capital expenditure is distributed under these groups: routine expenditure, major projects, and replacement. They may include acquiring the following assets:
- Facility or factory, including upgrades or expansions.
- Vehicles used for business.
- Manufacturing Equipment and Computers.
- Furniture, etc.
Capital expenditures are often used for company investments or new projects. It allows the company to expand its sources of income.
Revenue expenditures are short-term company expenses in the current period or for the year. They include expenses necessary to cover the business’s ongoing operating expenses. Revenue expenditures also include the normal expenses of repairs and regular maintenance, repaints, and upgrades. With them, maintaining assets in working order will be possible.
Types of revenue expenditures
Types of revenue expenditure can be categorized under two groups: direct and indirect expenses. The first type is mainly associated with the production process, and the second is the sale and distribution of finished products or services:
- Employee salaries.
- Any overhead costs, such as corporate office wages.
- Business trip.
- Utilities and rent.
- Property tax.
- Legal fees.
- Electricity costs.
- Research and Development (R&D), etc.
Revenue expenditures are deducted from the revenue that the company earns from sales in order to end up with a net income. Also, they can be fully deducted from taxes in the same year they are incurred.
Next, we will learn to distinguish between revenue expenditure and capital expenditure with examples.
Examples of revenue expenditure and capital expenditure
Consider capital expenditure and revenue expenditure and receipts with examples. Let’s take Tesla Inc. as an instance to understand the placement of capital and revenue expenditures on the books of accounts. Below are the income and cash flow statements as of June 30, 2020.
Capital expenditure example
In the investing section of the cash flow statement, you see the cash outflow for capital expenditures.
In the second quarter of 2020, сapital expenditure increased from $547 million to $1.046 billion compared to the second quarter of 2019. This increase resulted from $1.001 billion in property and equipment purchases and $46 million in solar power systems.
Revenue expenditure example
Revenue expenditures are reported on the income statement as operating expenses. Revenue expenditure in the second quarter of 2020 decreased from $1.088 billion to $940 million compared to the same period in 2019. Cutting operating expenses helped boost the company’s net income for the quarter, which posted a $327 million increase in net income.