A company’s capital expenditures (CapEx) are funds used to acquire, update, and maintain tangible assets such as land, plants, buildings, technology, or equipment. CapEx is frequently used by businesses to fund new projects or expenditures.
Repairing a roof, purchasing equipment, or establishing a new factory are all examples of capital expenditures on fixed assets. Companies make this form of financial investment to create assets which are long-term in nature and allows the company to generate revenue for many years.
Capital expenditures are seen as an investment in the future of your company, rather than a one-time expense.
For example, if you own a small printing company and invest in a new printing press, the purchase would be considered a capital expenditure because the additional equipment is considered an investment that will add value to your business for many years.
Along with the creation of assets, repayment of loan is also capital expenditure, as it reduces liability.
Formula and Calculation of CapEx
CapEx = PP&E (current period) – PP&E (prior period) + Depreciation (current period)
PP&E= Property, Plant & Equipment
How To Account For Capital Expenditure
The term capital expense is a misnomer, from an accounting standpoint. It’s recorded as a capital asset rather than as an expense. Over the useful life of the asset, the costs are charged to the expense account as depreciation.
For example, a company purchases machinery worth $40,000, and records it in the asset account of the balance sheet. As the machine ages, its value starts declining which is measured by the depreciation. At the end of each accounting year, this reduced value is reflected by the depreciation expense in the financial statement.