Capital expenditure

Capital expenditure is an expenditure on long-lived assets, also referred to as fixed assets or non-current physical assets. The term capital investment is sometimes used to describe capita] expenditure. These fixed assets are acquired for use over a number of accounting periods. An addition to a fixed asset, to enhance its functionality, is considered as capital expenditure. For example, a roof rack added to a car is a capital expenditure.

Expenditures made for long-term assets are referred to as capital expenditures and are recorded as assets on the balance sheet. During the years that these assets (other than land) are used, their costs are systematically moved from the balance sheet to the income statement through Depreciation Expense.

The amount to be spent on an asset and the length of useful life it requires to be classified as capital expenditure depend on the policy of each organization. For example, an organization may refer to any expenditure greater than $500 on an asset with a useful life of more than 24 months as capital expenditure. If any amount less than $500 is spent on an asset, or if the asset’s useful life is shorter than 24 months, the expenditure is treated as operating expenditure.

The following are examples of capital expenditure:

  • acquisition of land;

  • acquisition of buildings and subsequent additions and extensions;

  • installation of permanent fixtures and fittings;

  • installation of plant and machinery; and

  • acquisition of vehicles, furniture, computers and other equipment.

It should be noted that many assets, when purchased, might not be readily usable. For example, if a hospital buys a new X-ray machine, it has to be installed in a special room. There will be expenditure on making the room suitable for this machine, installing it and testing whether it is working properly. There may also be costs incurred by training staff to handle the new machine. Therefore, capital expenditure is not just the purchase price of the fixed asset. The purchase price is a direct cost.

There may also be one or more of the following indirect costs:

  • planning and designing costs;

  • site preparation;

  • freight on the asset;

  • installation;

  • professional fees; and

  • initial operator training costs.

Subsequently, there could be some expenditure on a fixed asset to maintain it in its current condition or to restore it to good working order. This expenditure is an operating expenditure.

Examples of items treated as operating expenditure are:

  • repairs to buildings, plant and equipment, machinery, furniture and vehicles

  • renewal of fixtures and fittings;

  • replacement of components; and

  • interest on loans obtained for capital investment.