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    Monday
    Aug162010

    What is a capital expenditure?

    A capital expenditure is the expenditure of funds or assumption of a liability in order to obtain physical assets that are to be used for productive purposes for at least one year.

    A capital expenditure is recorded as an asset, rather than charging it immediately to expense. The fixed asset is then charged to expense over the useful life of the asset, using depreciation. For example, if you acquire a $25,000 asset and expect it to have a useful life of five years, charge $5,000 to depreciation expense in each of the next five years.

    An example of an asset upgrade is adding a garage onto a house, since it increases the value of the property, whereas repairing a dish washer merely keeps the machine in operation.

    Examples of capital expenditures are buildings, computer equipment, machinery, office equipment, and software.

    Since there is a record keeping cost associated with capital expenditures, you generally charge such items to expense if they cost less than a certain predetermined limit, which is known as the capitalization limit. For example, if a company's capitalization limit is $2,000, then a computer costing $1,999 would be charged to expense in the period incurred, whereas it would be recorded as an asset if it cost $2,001.

    The reverse of a capital expenditure is an operational expenditure, where the cost is incurred strictly for current operations. Always charge operational expenditures to expense when incurred.

    From a financial analysis perspective, a business should at least maintain its historical level of capital expenditures. Otherwise, it will be suspected that management is not adequately reinvesting in the organization, which will eventually lead to a decline in the business.

    Similar Terms

    A capital expenditure is also known as a capital expense, or as capex.

    Related Topics

    Overview of capital budgeting
    What does capitalize mean?
    What is capitalized interest?
    What is the correct capitalization limit?

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