It’s graduation day. You’re clad in academic regalia and it’s time that you and your peers throw your graduation hats in unison. Feelings of excitement, pride, and anticipation are in the air, along with those of loss, discouragement, and fear.
Long story short, you are now a master’s graduate. It’s time to take up a job, maybe start a business. Your friends congratulate you, ask you about your future plans and then start their own conversation about business.
For the longest time, you’ve been inclined towards science. Business has hardly crossed your mind. In fact, you feel like a fish out of water, when your friends start talking about taxation and budgets and their next big plan for their business. Maybe they had already made it in life with the businesses that they run.
And then they speak about CapEx and RevEx. At this point, you’re completely lost and realize that if you want to start a business a few years down the line, there are a few things that you’ll have to learn.
In this article, we shall take a look at what CapEx and RevEx are, and understand the difference between capital expenditure and revenue expenditure. Keep reading to find out!
What is Capital Expenditure a.k.a., CapEx?
Capital expenditure or CapEx refers to funds used by a company to acquire, upgrade or maintain assets such as equipment. This expenditure is added to the assets side of the balance sheet and not to the income statement.
Typically, capital expenditures are one-time large purchases of fixed assets that help in generating revenue over a long period of time.
Spending money on land, buildings, machinery, equipment, developing new products or services, licenses, patents, as well as acquiring another company qualify as capital expenditure.
It is assumed that capital expenditure will be consumed over the useful life of a related asset. Thus depreciation is charged in CapEx every year and the asset is gradually charged to expense over its useful life.
Capital Expenditure is divided into three distinct groups:
Expansion:
This covers expenses that are made to expand the business, such as purchasing new equipment or opening a new branch.
Replacement
This includes expenditures that are incurred to replace existing assets that have reached the end of their useful life, with new ones
Improvement
This comprises expenditures that are made to improve the efficiency or quality of existing assets.
What is Revenue Expenditure a.k.a., RevEx?
Revenue Expenditure or RevEx refer to funds that are used to run the day-to-day operations of a business. They are recorded on the income statement and are subtracted from the revenue that a company generates.
Revenue expenditure is for the short-term. A few examples of revenue expenditure include monthly salaries and wages, selling, general and administrative expenses, utilities, rent, research and development, business travel, property taxes and the like.
RevEx can be divided into two categories:
Operating Expenditure
This expenditure is essential for meeting the operational cost of a business, hence these are classified as operating expenses.
Expenditures for maintaining revenue-generating assets
Expenses incurred towards the periodic repair and maintenance of the assets of an organization to keep them in good working condition is classified as revenue expenditure. This does not substantially improve or extend the useful life of the asset.
Difference between Capital Expenditure and Revenue Expenditure
| Parameter | Capital Expenditure | Revenue Expenditure |
| Definition | Money spent by a business entity to acquire assets or improve the quality of existing ones | Money spent by a business entity to maintain their everyday operations |
| Tenure | For the long-term | For the short term |
| Accounting Treatment | Added to the assets side of the balance sheet and gradually charged as an expense over a long period of time via depreciation | Recorded on the income statement and subtracted from the revenue that a company generates to arrive at net income or profit |
| Purpose | To increase a company’s ability to generate revenue | To run the day-to-day business and maintain assets in working order |
| Size | CapEx tends to involve larger monetary sums | RevEx may be small or large, depending on the nature of the expense |
| Occurrence | Not very frequent | Recurring |
| Capitalization | Yes | No |
| Matching Principle | Capital expenditure and receipts are not matched | Revenue expenditure must be matched with revenue receipts |
| Taxation | The cost of the asset is capitalized and depreciated over its useful life. The annual depreciation is deductible from taxable income. | Revenue expenditures are fully deductible from taxable income in the year they are incurred. |
In Closing
Capital expenditure and revenue expenditure are two types of expenses that businesses incur. The distinction between CapEx and RevEx is the quantity of the spending, the accounting approach, and whether the purchases will be used over the long-term or short-term.
Businesses must comprehend the distinctions between capital expenditure and revenue expenditure in order to plan their budgets wisely and keep accurate records of their expenditures.
Read More: Winning the Long-Term Game: Diversification vs. Concentration
FAQs
Money spent by companies to acquire or improve the quality of their assets are referred to as capital expenditure. These expenditures are added to the assets side of the balance sheet and are expected to be productive over a longer period of time.
Revenue expenditure is the money spent by business entities to maintain their everyday operations. These expenditures are recorded in the income statement and subtracted from the revenue that a company generates.
Some examples of capital expenditures include
purchasing land or buildings, buying machinery or
equipment, upgrading existing equipment, developing
new products or services, obtaining licenses,
patents and even acquiring another company.
Examples of revenue expenditures include 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), utilities and rent, business travel, and property taxes.
Capital expenditures are added on the asset side of the balance sheet and are gradually charged to expense over a long period of time via depreciation. On the other hand, revenue expenditures are recorded on the income statement and are subtracted from the revenue that a company generates from sales to eventually arrive at the net income or profit for the period.
