Nature of capital expenditure

Businesses often face the need to spend large amounts of money on assets that will be functional for many years. Here are a few examples:

  • Equipment to improve an unsafe work situation or to protect the environment

  • Equipment to test the consistency of products as required by the customer

  • Equipment to package, label, and ship products according to the customer’s specifications

  • Equipment to reduce labor costs and improve the quality of products

  • Purchase of a building instead of leasing space

The expenditure of an organization may be grouped in two main categories: (1) operating, or revenue, expenditure; and (2) capital expenditure.

An operating expenditure, as seen in the previous chapters, is expenditure on day-to-day running of a business. These expenses provide no benefits beyond those of the current period. As they are charged against current revenues, they are sometimes called revenue expenditure.