The difference between capital expenditures and revenue expenditures
/What are Capital Expenditures?
Capital expenditures are for fixed assets, which are expected to be productive assets for a long period of time. The term comes from the concept of capitalization, where an expenditure is recorded as an asset, rather than being recorded as an expense.
What are Revenue Expenditures?
Revenue expenditures are for costs that are related to specific revenue transactions or operating periods, such as the cost of goods sold or repairs and maintenance expense. These expenditures are recorded as expenses as soon as they are incurred.
Capital Expenditures vs. Revenue Expenditures
The differences between these two types of expenditures are noted below. There are timing differences, consumption differences, and size differences.
Timing Differences
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.
Consumption Differences
A capital expenditure is assumed to be consumed over the useful life of the related fixed asset. A revenue expenditure is assumed to be consumed within a very short period of time.
Size Differences
A more questionable difference is that capital expenditures tend to involve larger monetary amounts than revenue expenditures. This is because an expenditure is only classified as a capital expenditure if it exceeds a certain threshold value; if not, it is automatically designated as a revenue expenditure. However, certain quite large expenditures can still be classified as revenue expenditures, as long they are directly associated with revenue transactions or are period costs.
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Types of Capital Expenditures
Capital expenditures are usually recorded within one of the major fixed asset classifications. Examples of these classifications are buildings, computers, furniture and fixtures, machinery, and vehicles. The useful life of a capital expenditure may be determined based on the classification assigned to it.
Types of Revenue Expenditures
Revenue expenditures are recorded within the expense classifications. Examples of these classifications are administrative expenses, compensation, research and development, property taxes, travel, and utilities.