UK Accounting Glossary
Capital expense or capital expenditure; the initial costs of a business, in contrast to operational expenditure.
“Capital expenditure” or “capital expense” is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairing the roof.
Capex, an abbreviated word that signifies “capital expenditures,” capex is the amount of money spent by a company to upgrade, acquire, or maintain depreciable and tangible long-term physical assets. A few examples of assets for which capex spending is applied include factory and manufacturing plant, operating equipment used for production, and machinery. Periodic capex expenses are expense allocations of the total capex amount as capitalized over the life of the related assets. Also called “capital spending” or “capital expense,” capex can be a large expense item in manufacturing and owned distribution facility companies. Capex can be a very small expense income statement item or cash flow charge for a service company. The “capital” in capex comes from the accounting definition of capital expense where “capital asset” means the asset is long term and not bought or sold in the normal course of business. Capex is important in financial ratio measures such as “working-capital-to-capex” which measures the amount of operating spending compared with long-term plant investment and in “capex-to-total-debt” that measures investment relative to borrowing. Capex is sometimes further divided into “maintenance capex” (spend to keep companies running smoothly) and “expansion capex” (spend devoted to increase productive capacity).
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This glossary post was last updated: 4th February 2020.