What is a capital expenditure?

You have made a capital expenditure when you pay to acquire or upgrade an asset. You record a capital expenditure as an asset (usually in a Property, Plant, & Equipment account), rather than charging it immediately to expense. Instead, you charge it to expense over the useful life of the asset, using depreciation. For example, if you acquire a $25,000 asset and you expect it to have a useful life of five years, then you should 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 the company's capitalization limit is $2,000, then you would charge a computer to expense in the current period if it cost $1,999, and you would treat it as a capital expenditure if it cost $2,001.

The reverse of a capital expenditure is an operational expenditure, where the cost is incurred strictly for current operations. You 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 business, 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?