What is Capital Expenditure
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Answer Posted / dixit m shah
Capital expenditures (CAPEX or capex) are expenditures
creating future benefits. A capital expenditure is incurred
when a business spends money either to buy fixed assets or
to add to the value of an existing fixed asset with a
useful life that extends beyond the taxable year. Capex are
used by a company to acquire or upgrade physical assets
such as equipment, property, or industrial buildings. In
accounting, a capital expenditure is added to an asset
account ("capitalized"), thus increasing the asset's basis
(the cost or value of an asset as adjusted for tax
purposes). Capex is commonly found on the Cash Flow
Statement as "Investment in Plant Property and Equipment"
or something similar in the Investing subsection.
For tax purposes, capital expenditures are costs that
cannot be deducted in the year in which they are paid or
incurred, and must be capitalized. The general rule is that
if the property acquired has a useful life longer than the
taxable year, the cost must be capitalized. The capital
expenditure costs are then amortized or depreciated over
the life of the asset in question. As stated above, capital
expenditures create or add 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
ยงยง263 and 263A deal extensively with capitalization
requirements and exceptions.[1]
Included in capital expenditures are amounts spent on:
acquiring fixed assets
fixing problems with an asset that existed prior to
acquisition
preparing an asset to be used in business
legal costs of establishing or maintaining one's right of
ownership in a piece of property
restoring property or adapting it to a new or different use
starting a new business
An ongoing question of the accounting of any company is
whether certain expenses should be capitalized or expensed.
Costs that are expensed in a particular month simply appear
on the financial statement as a cost that was incurred that
month. Costs that are capitalized, however, are amortized
over multiple years. Capitalized expenditures show up on
the balance sheet. Most ordinary business expenses are
clearly either expensable or capitalizable, but some
expenses could be treated either way, according to the
preference of the company.
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