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Capital expenditure or capital expense (capex or CAPEX) 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. Capital expenditures contrast with
operating expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure Capital expenditure or capital expense (cap ...
s (opex), which are ongoing expenses that are inherent to the operation of the asset. Opex includes items like
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electricity
or cleaning. The difference between opex and capex may not be immediately obvious for some expenses; for instance, repaving the parking lot may be thought of inherent to the operation of a
shopping mall A shopping mall (or simply mall) is a North American term for a large indoor shopping center A shopping center (American English) or shopping centre (Commonwealth English), also called a shopping complex, shopping arcade, shopping plaza or ga ...

shopping mall
. The dividing line for items like these is that the expense is considered capex if the financial benefit of the expenditure extends beyond the current
fiscal year A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial report Financial statements (or financial reports) are formal ...
.


Usage

Capital expenditures are the funds used to acquire or upgrade a company's
fixed asset Fixed assets, also known as long-lived assets, tangible assets or property, plant and equipment (PP&E), is a term used in accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science) ...
s, such as expenditures towards property, plant, or equipment (PP&E). In the case when a capital expenditure constitutes a major financial decision for a company, the expenditure must be formalized at an annual shareholders meeting or a special meeting of the Board of Directors. In
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other ob ...
, a capital expenditure is added to an asset account, thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes). Capex is commonly found on the
cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
under "Investment in Plant, Property, and Equipment" or something similar in the Investing subsection.


Accounting rules

For tax purposes, capex is a cost that cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The capital expenditure costs are then
amortized In computer science, amortized analysis is a method for Analysis of algorithms, analyzing a given algorithm's Computational complexity theory, complexity, or how much of a resource, especially time or memory, it takes to Execution (computing), execu ...
or
depreciated In accountancy Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to co ...

depreciated
over the life of the asset in question. Further to the above, capex creates or adds 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 ยงยง263 and 263A deal extensively with capitalization requirements and exceptions.Donaldson, Samuel A. Federal Income Taxation Of Individuals: Cases, Problems and Materials (2nd ed.). St. Paul: Thomson West, 2007. pg. 173 Included in capital expenditures are amounts spent on: # acquiring fixed, and in some cases, intangible assets # repairing an existing asset so as to improve its useful life # upgrading an existing asset if it results in a superior fixture # preparing an asset to be used in business # restoring property or adapting it to a new or different use # starting or acquiring a new business An ongoing question for the accounting of any company is whether certain costs incurred should be ''capitalized'' or ''expensed''. Costs which are expensed in a particular month simply appear on the
financial statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...
as a cost incurred that month. Costs that are capitalized, however, are amortized or depreciated over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business costs are either expensable or capitalizable, but some costs could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset. Sometimes an organization needs to apply for a line of credit to build another asset, it can capitalize the related
interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availa ...

interest
cost.
Accounting Rules Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other obj ...
spreads out a couple of stipulations for capitalizing interest cost. Organizations can possibly capitalize the interest given that they are building the
asset In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...
themselves; they can't capitalize interest on an advance to buy the asset or pay another person to develop it. Organizations can just perceive interest cost as they acquire costs to develop the asset. The counterpart of capital expenditure is
operating expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure Capital expenditure or capital expense (cap ...
or operational cost (opex).


See also

*
Operating expense An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system . Its counterpart, a capital expenditure Capital expenditure or capital expense (cap ...
(operational expenditure, opex) *
Total cost of ownership Total cost of ownership (TCO) is a financial estimate intended to help buyers and owners determine the direct and indirect costs Indirect costs are costs that are not directly accountable to a cost object A cost object is a term used primarily i ...
(TCO) *
Contract management softwareContract management software is the range of computer programmes, libraries and data used to support contract management, contract lifecycle management, and contractor management on projects. It may be used with project management software. Advantag ...
*
Capital cost Capital costs are fixed, one-time expenseExpenditure is an outflow of money Image:National-Debt-Gillray.jpeg, In a 1786 James Gillray caricature, the plentiful money bags handed to King George III are contrasted with the beggar whose legs and ar ...
*
Cash flow statement In financial accounting, a cash flow statement, also known as ''statement of cash flows'', is a financial statements, financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the a ...
*
Income statement An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''statemen ...
*
Balance sheet In financial accounting Financial accounting is the field of accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such a ...

Balance sheet
*
Expenses versus capital expenditures Under the U.S. tax code, businesses expenditures can be deducted from the total taxable income when filing income taxes if a taxpayer can show the funds were used for business-related activities, not personal or capital expenses (i.e., long-term, t ...


References

{{Accounting navbox Financial capital Accounting terminology Capital budgeting Fixed asset