Is Capital Expenditure Treated As a Revenue Expenditure?
The profit-and-loss statement calculation begins with revenue. The expenses associated with directly producing the product or service are called cost of goods sold and are subtracted from revenue to arrive at gross margin. Administrative and operational expenses are subtracted from the gross margin, as is depreciation, to arrive at operating income. A capital expenditure is not treated as a revenue expenditure on the income statement or the balance sheet.
An expenditure is a payment, while an expense is a cost that is reported on the profit-and-loss statement. Sometimes the expense can be the same thing as the expenditure. For example, salaries are expenditures that are expenses as well. In other cases, they are completely different. Buying a truck is an expenditure. The depreciation of the value of the truck is an expense that is included in each month's profit-and-loss statement.
A capital expenditure describes the acquisition of assets that benefit the business for longer than one year. Such assets include a building, truck, car, manufacturing equipment and computer systems. The asset is purchased with cash, a loan or other financing. Each year the asset is depreciated, which means the value decreases by the amount of calculated depreciation. By the end of the asset's useful life, it will be fully depreciated and show no value on the balance sheet. The logic is that the expense of a capital expenditure should be spread over the useful life of the asset and matched against revenues during that period, rather than shown as an expense the month it's acquired with no further expense. Because the asset lasts more than one year a capital expenditure is not treated as a revenue expenditure.
Keeping the building, car or other capital assets in good running order are considered maintenance expenses rather than additional capital expenditures. The exception would be if you add to the value of the asset. For example, you could increase the storage space of your manufacturing facility by adding on to the building. The cost of the additional storage space is a capital expenditure.
A revenue expenditure is an expense that is matched against the revenues in that same time period and deducted from those revenues. Day-to-day operating expenses such as salaries, office supplies, advertising, sales commissions, utilities and telecommunications would be considered revenue expenditures. Maintaining a website and social media marketing are also revenue expenditures. Because the expenditure is matched against revenues each month, it is not reflected on the balance sheet the way a capital expenditure is.