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, machinery, and office equipment.

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.

Related Topics

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