Current Business Expense vs. Capital Expenditure

Instructor: Deborah Schell

Deborah teaches college Accounting and has a master's degree in Educational Technology.

When a business purchases something to use in its business, it must decide how to record the transaction. In this lesson, you will learn about current expenses and capital expenditures.

Expenses vs. Expenditures

Teagan owns a very successful pizza restaurant in her hometown. She just returned from a meeting with her accountant where they reviewed the business's most recent financial information. Her accountant suggested a number of adjustments and explained that Teagan can expense some of her purchases and record others as capital expenditures. Teagan doesn't really understand the difference between these terms. Let's explore these two options.

Businesses incur expenses or costs when they buy items to use in the business every day. Businesses such as Teagan's Pizza can choose to record the item as a business expense in the current year or as a capital expenditure.

Current Business Expense

A current business expense is an expense that a business incurs to purchase everyday items needed to run the business. For example, Teagan needs to purchase paper for her cash registers and pay for electricity for her restaurant. These expenses won't provide Teagan with any lasting benefit and are used up within a year. Other examples of current business expenses include rent payments, expenses for water, advertising, and telephone and internet expenses.

Current business expenses are recorded as expenses in the year that they are incurred. They reduce a company's net income or revenue (the amount of money it makes from selling its pizzas less the expenses it incurs to sell pizzas). Let's assume that Teagan's Pizza earned $7,000 in revenue last month and incurred $5,500 in current business expenses. Teagan will report a net income of $1,500 ($7,000 - $5,500). Since current business expenses reduce Teagan's Pizza's net income, her business will pay less tax.

Capital Expenditure

When a business makes a capital expenditure, it is buying something that will provide it with a benefit for longer than a year. Let's assume that Teagan's Pizza purchases a new delivery vehicle for $25,000. Teagan will use this vehicle for a number of years and she will classify it as a capital expenditure.

Capital expenditures are not expensed in the year in which they are incurred. Instead, Teagan will record the purchase of the vehicle as an asset (something owned by the business that has value) and she will record depreciation (an expense to recognize that the business is using up part of the asset every year). Let's assume that annual depreciation for Teagan's new delivery vehicle is $2,500. This depreciation expense will reduce Teagan's Pizza's net income by $2,500 each year that she uses the delivery vehicle.

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