Capital expenditure

Capital Expenditure or CapEx refers to the funds used by a company to acquire, upgrade, and maintain physical assets. This could include property, buildings, an industrial plant, technology, or equipment. CapEx is often used to undertake new projects or investments by the firm. This type of financial outlay is also made by companies to increase the scope of their operations.

Overview

Capital expenditure is considered an investment and it is categorized on a company's balance sheet. The cost of the capital expenditure is amortized over the life of the asset. Unlike revenue expenditure, which is recorded as an expense in Income Statement, CapEx is reflected in the Balance Sheet and Cash Flow Statement.

Types of Capital Expenditure

There are two types of capital expenditures: tangible assets and intangible assets. Tangible assets are physical assets like buildings, machinery, and equipment. Intangible assets, on the other hand, are non-physical assets like patents, copyrights, trademarks, business methodologies, and goodwill.

Importance of Capital Expenditure

Capital expenditure is important for companies to grow and maintain their business operations. It is used to acquire assets that will help the company generate profits in the future. It also shows the company's belief in its future performance.

Calculation

Capital expenditure can be calculated by adding the change in property, plant, and equipment (PPE) to the current period's depreciation. This formula is used because depreciation is a non-cash expense that is regularly charged against the company's total assets.

See Also

• Operating Expenditure
• Financial Management
• Investment
• Depreciation

References

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