Wize University Introduction to Financial Accounting Textbook > Long-Term Assets
Capital Expenditures vs Operating Expenses
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Capital Expenditures vs Operating Expenses
When a company spends money on things related to their long-term fixed assets, the expenditure is either classified as a capital expenditure or an operating expense.
Operating Expenses
- Costs incurred during regular business.
- Benefit is received in the current period.
- Reported on the income statement in the period it is incurred.
- Operating expenses related to long-term assets:
- Repairs
- Maintenance
- Insurance
- Depreciation
Capital Expenditures
- Costs incurred to purchase or improve asset.
- Future benefit is expected.
- Reported on the balance sheet until benefit is received.
- Added to the value of the asset that is purchased or improved.
- When benefit is received, it becomes an operating expense.
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Example: Capital Expenditures vs Expenses
ABC Inc. owns several delivery trucks used in its operations. During 2020, the company spent $10,000 cash replacing the engine on one of its trucks. The company expects that as a result of the replacement, the truck will be useful for 200,000 km more than initially expected. The company took advantage of the truck being in the shop to have the tires replaced and oil changed, as well as all other annual maintenance that was needed. The cost of these repairs were $4,500, also paid in cash.
Prepare the journal entries to record the repairs.
Journal entry to record the engine replacement
Journal entry to record the tire replacement and oil change
Practice: Capital Expenditures vs Expenses
For each of the following repairs, choose whether they should be considered a revenue expense or a capital expenditure.
Annual maintenance on a delivery truck including change or oil, change of air filters and change of tires.
Practice: Capital Expenditures vs Expenses
Journalize the following transactions for ABC Inc.:
On January 17th, 2020 the company spent $250,000 in cash to renovate the building. The renovations included adding 3 additional floors to the building and replacing the exterior bricks.
Transactions:
| Account | Debit | Credit |
|---|---|---|