Capital expenditure

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Capital expenditure or capital expense (capex or CAPEX) is the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. [1] [2] It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairing the roof. [3]

Contents

Capital expenditures contrast with operating expenses (opex), which are ongoing expenses that are inherent to the operation of the asset. Opex includes items like electricity or cleaning. The difference between opex and capex may not be immediately obvious for some expenses; for instance, repaving the parking lot may be thought of inherent to the operation of a shopping mall. The dividing line for items like these is that the expense is considered capex if the financial benefit of the expenditure extends beyond the current fiscal year. [4]

Usage

Capital expenditures are the funds used to acquire or upgrade a company's fixed assets, such as expenditures towards property, plant, or equipment (PP&E). [3] In the case when a capital expenditure constitutes a major financial decision for a company, the expenditure must be formalized at an annual shareholders meeting or a special meeting of the Board of Directors.[ citation needed ] In accounting, a capital expenditure is added to an asset account, thus increasing the asset's basis (the cost or value of an asset adjusted for tax purposes). Capex is commonly found on the cash flow statement under "Investment in Plant, Property, and Equipment" or something similar in the Investing subsection.[ citation needed ]

Accounting rules

For tax purposes, capex is a cost that cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized.[ citation needed ] The capital expenditure costs are then amortized or depreciated over the life of the asset in question. Further to the above, capex creates or adds basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions. [5]

Included in capital expenditures are amounts spent on:

  1. acquiring fixed, and in some cases, intangible assets
  2. repairing an existing asset so as to improve its useful life
  3. upgrading an existing asset if it results in a superior fixture
  4. preparing an asset to be used in business
  5. restoring property or adapting it to a new or different use
  6. starting or acquiring a new business

An ongoing question for the accounting of any company is whether certain costs incurred should be capitalized or expensed. Costs which are expensed in a particular month simply appear on the financial statement as a cost incurred that month. Costs that are capitalized, however, are amortized or depreciated over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business costs are either expensable or capitalizable, but some costs could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset. Sometimes an organization needs to apply for a line of credit to build another asset, it can capitalize the related interest cost. Accounting Rules spreads out a couple of stipulations for capitalizing interest cost. Organizations can possibly capitalize the interest given that they are building the asset themselves; they can't capitalize interest on an advance to buy the asset or pay another person to develop it. Organizations can just perceive interest cost as they acquire costs to develop the asset.

The counterpart of capital expenditure is operating expense or operational cost (opex).

See also

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Expenditure is an outflow of money, or any form of fortune in general, to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often referred to as an expense. An expense is a cost that is "paid" or "remitted", usually in exchange for something of value. Something that seems to cost a great deal is "expensive". Something that seems to cost little is "inexpensive". "Expenses of the table" are expenses of dining, refreshments, a feast, etc.

Depreciation Decrease in asset values, or the allocation of cost thereof

In accountancy, depreciation refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used.

An intangible asset is an asset that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software. This is in contrast to physical assets and financial assets. An intangible asset is usually very difficult to evaluate. They suffer from typical market failures of non-rivalry and non-excludability.

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Income statement

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Earnings before interest, taxes, depreciation and amortization

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Operating expense

An operating expense, operating expenditure, operational expense, operational expenditure or opex is an ongoing cost for running a product, business, or system. Its counterpart, a capital expenditure (capex), is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier involves capex, and the annual paper, toner, power and maintenance costs represents opex. For larger systems like businesses, opex may also include the cost of workers and facility expenses such as rent and utilities.

Earnings before interest and taxes

In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses except interest expenses and income tax expenses.

Consumption of fixed capital

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Faux frais of production

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Accounting for leases in the United States

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References

  1. "capital expenditure (capex)". BusinessDictionary. Retrieved 11 July 2017.
  2. "What is a Capital Expenditure (CAPEX)?". My Accounting Course. Retrieved 11 July 2017.
  3. 1 2 Hayes, Adam (18 November 2003). "Capital Expenditure (capex)". Investopedia. Retrieved 11 July 2017.
  4. "What is CapEx and OpEx?".
  5. Donaldson, Samuel A. Federal Income Taxation Of Individuals: Cases, Problems and Materials (2nd ed.). St. Paul: Thomson West, 2007. pg. 173