Discussion Issues and Derivations

  1. Operating versus Capital Expenditures
    ccountants draw a distinction between expenditures that yield benefits only in the immediate period or periods (such as labor and material for a manufacturing firm) and those that yield benefits over multiple periods (such as land, buildings and long-lived plant). The former are called operating expenses and are subtracted from revenues in computing the accounting income, while the latter are capital expenditures and are not subtracted from revenues in the period that they are made. Instead, the expenditure is spread over multiple periods and deducted as an expense in each period - these expenses are called depreciation (if the asset is a tangible asset like a building) or amortization (if the asset is an intangible asset like a patent or a trade mark).
    While the capital expenditures made at the beginning of a project are often the largest and most prominent, many projects require capital expenditures during their lifetime. These capital expenditures will reduce the cash available in each of these periods.