Business, Legal & Accounting Glossary
Spending on non-current (fixed) assets of a business.
n. payment by a business for basic assets such as property, fixtures, or machinery, but not for day-to-day operations such as payroll, inventory, maintenance and advertising. Capital expenditures supposedly increase the value of company assets and are usually intended to improve productivity.
A capital expenditure is one in which a durable asset is purchased that is intended to increase the profits of a business for an extended period. That is in contrast to a consumable which is depleted as it is used and must be replaced. Consumables are treated as an expense.
Capital expenditures (CAPEX or Capex) are expenditures creating future benefits. Capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. In accounting, a capital expenditure is added to an asset account (“capitalized”), thus increasing the asset’s basis (the cost or value of an asset as adjusted for tax purposes). Capex is commonly found on the Cash Flow Statement as “Investment in Plant Property and Equipment” or something similar in the Investing subsection.
For tax purposes, capital expenditures are costs that cannot be deducted in the year in which they are paid or incurred, and must be capitalized. The general rule is that if the property acquired has a useful life longer than the taxable year, the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question. As stated above, capital expenditures create or add basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions.
Included in capital expenditures are amounts spent on:
An ongoing question of the accounting of any company is whether certain expenses should be capitalized or expensed. Costs that are expensed in a particular month simply appear on the financial statement as a cost that was incurred that month. Costs that are capitalized, however, are amortized over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business expenses are clearly either expensable or capitalizable, but some expenses could be treated either way, according to the preference of the company.
The counterpart of capital expenditure is operational expenditure (“OpEx”).
Capital expenditures can be of various types including land, the construction of a new plant, or the installation of new equipment. Rules that determine what can be capitalized can be complex. For example remodelling a plant often can be capitalized. So can certain expenses after an acquisition, such as moving expenses for employees.
Tax laws allow some capital assets to be depreciated. Depreciation recognizes that the equipment gradually wears out and must be replaced. Hence, a portion of its cost is allocated as a business expense. The effect is to protect a portion of the firm’s income from taxes and to provide funds for reinvestment in the business.
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Definitions for Capital Expenditure are sourced/syndicated and enhanced from:
This glossary post was last updated: 4th August, 2021 | 15 Views.