Revenue expenditures vs. capital expenditures: what's the difference?

Updated On: September 27, 2019
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When you’re running your SaaS business, dealing with a huge glossary of financial terms daily, it’s to be expected that you might occasionally get two terms with similar meanings mixed up. You might confuse your deferred revenue with your fulfilled revenue or with your backlog, for instance. They’re easy mistakes to make, but they can have serious unintended consequences for your business.

The difference between revenue expenditures and capital expenditures is another example of two similar terms that are easily mixed up. Understanding how each should be tracked can mean big savings over time and should be a firm part of your accounting strategy.

What is a revenue expenditure?

Revenue expenses are incurred when a company purchases products or services necessary for generating revenue in the short term. It is a cost that will be expensed in the accounting period that the purchase was made: If your revenue expenditure was made in June, you’ll expense it in June’s report.

For example, if Company A spends $1,000 per month on updates for a key piece of software used by each team member each month, then the $1,000 is a revenue expenditure in Company A’s monthly statement. If Company B has to spend $400 per month on replacement components for its production line, then that $400 counts as a revenue expenditure for that month.

Furthermore, the full price of both examples ($12,000 and $4,800, respectively) can be deducted from each company’s taxes the year they pay for the goods in question.

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What do revenue expenditures look like?

Everything your company buys that is not a fixed asset falls under revenue expenditure, from new desk stationery to building maintenance. Revenue expenditures like those below are reported on the monthly revenue bill against that expense period’s (week/month/quarter) revenue.

Ongoing operating expenses

Any expense that recurs consistently over a given time is a revenue expense. For example, any maintenance costs to a building owned by your company are revenue expenditures.

Certain productions costs, such as the overall price of goods or the subscription payments on development software, also qualify as operating expenses and can be reported as revenue expenditures.

Small amounts expensed immediately

Revenue expenditures tend to be small. In some cases an accounting department may choose to impose an internal threshold limit for revenue expenditure—anything above a certain price will be treated as a capital expenditure and will be expensed as such.

These small costs will be listed as expenses in the current accounting period and will offset against revenue immediately.

Capital expenditures vs. revenue expenditures

It’s not enough to say that capital expenditures are everything that revenue expenditures aren’t. They break down differently, depending on the size of the payment and the time across which it needs to be paid for. Plus, capital expenditures will show up differently on your reporting metrics.

Consumption period

Revenue expenditures expense in the current period, or shortly thereafter, and are consumed within a very short time. After this, they will bear no further effect on your expenses, unless they recur, in which case each separate recurrence is expensed separately.

Capital expenditures—any outlay made by your company to procure fixed assets, such as the long-term use of machinery or property—are assumed to be consumed over their useful life and are expensed gradually, via their depreciation value. Company B’s brand-new research facility, for instance, would be a capital expenditure. The costs of running the machinery in it, on the other hand, would be revenue expenditures.

Depending on the type and price of machinery in question, the cost of buying those machines would be either revenue or capital expenditures. Long-term-use machines, or machines that are much more expensive, would come under the capital bracket; anything else would settle as revenue expenditures.

Dollar amount

Revenue expenditures are usually less expensive than capital expenditures, small enough to be expensed against a shorter revenue period.

Capital expenditures involve larger monetary amounts that are too large to be expensed against a shorter revenue period. They were purchased because of their long-term benefits of growing a company or generating profit.

Examples of revenue and capital expenditures

So far, we’ve spoken mainly about physical revenue expenditures. But the range is wider than that. All of the following are examples of revenue expenditures:

  • Routine repair/update costs on equipment

  • Smaller-scale software initiative or subscription

  • Cost of goods sold

  • Rent on a property

  • Salaries and wages

  • Insurance

  • Advertising

Company A

An example graph showing Company A’s revenue expenditures for June 2019. For the purposes of demonstration, we’ll say that the company implemented a revenue expenditure threshold of $5,000; anything above that is expensed differently. As you can see, its revenue-expenditure tracking includes expenses that are rounded, and, in all likelihood, recurring monthly ($5,000 on advertising, $2,000 on insurance), as well as more as-needed outlays (a stationery haul or that bit of unforeseen HVAC on their building).

Because all of the following either create an asset for your company or reduce a liability, they are all examples of capital expenditures:

  • Price of property purchased

  • Whole-company software initiative or license

  • Furniture

  • Company vehicles

Revenue accounting done right

Without a proper understanding of the distinction between revenue and capital expenditures, not only can small expenses can fall through the cracks, but your understanding of your revenue will be incorrect and your taxes could even be wrong as well.

Forgot that maintenance costs aren’t factored into the capital expenditures on those new industrial printers? That’s a hole developing in your pocket all of a sudden—it’s a revenue expenditure. Thinking of billing your advertising costs at the end of your yearlong cycle? Don’t—that’s a revenue expenditure, too.

Keeping track of your costs correctly will tell you where you’re spending too much and allow you to assess where money is being spent effectively. And there are solutions that will help you do just that.


 

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