Capital Expenditure (CAPEX full form) is the expenditure made by a firm to improve its long-term assets or to purchase new equipment. It serves as a potent financial metric and helps financial analysts understand a company’s investment patterns.
Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company. Making capital expenditures on fixed assets can include repairing a roof if the useful life of the roof is extended, purchasing a piece of equipment, or building a new factory.
This type of financial outlay is made by companies in an effort to increase the scope of their operations or to add some future economic benefit to the operation
What is Capital Expenditure?
Capex meaning can be simply put as the sum of money invested by a company to acquire or even upgrade fixed or non-consumable assets.
CAPEX makes up the funds that business entities use to purchase, enhance or maintain long-term assets to boost the firm’s proficiency.
Typically, CAPEX is incurred to purchase long-term assets like – plant, equipment, building, machinery, furniture, and fixtures, among others. It also includes expenses incurred by way of purchasing intangible assets like licenses, trademarks, or patents.
It must be noted here that capital expenditure has a significant impact on a firm’s long-term and short-term financial standing. Resultantly, decisions about CAPEX are critical for the financial health and sustainability of a company.
Under general circumstances, CAPEX helps companies to maintain or boost their everyday operations.
CAPEX Formula
CAPEX = Net Increase in PP & E + Depreciation Expense
Types of CapEx
In a broader sense, such expenditure is classified into three groups –
- Expenses incurred to reduce costs
- Expenses incurred to increase earnings
- Expenses incurred on non-economic grounds
Furthermore, the capital analysis concentrates on three types of outlays –
- Major projects
- Routine Expenditure
- Replacement
Different types of capital expenditures-
- Acquisitions – These include tangible and intangible assets
- Renovations – This includes improvement of old assets to make them more functional for the long term
- Upgrades – It include enhancing the existing assets
Examples of Capital Expenditure
A few of the Capital Expenditure examples can be-
- A building used for office space
- Land for development
- Computers or Equipment
- Furniture
- Vehicles
- Patents, Licenses, etc.
Importance of Capital Expenditure
- The following pointers emphasise the significance of capital expenditure for a firm –
- CAPEX helps financial analysts to gauge a firm’s investment activities and their extent in general.
- The impact of capital expenditure is mostly felt in the long term. In fact, the scale of manufacturing activities is primarily governed by a firm’s past CAPEX concentration. Also, the current capital expenses tend to pave the way for future operations.
- It proves useful in calculating free cash flow to equity for a firm. It helps to determine the free cash flow of an organisation with respect to its equity.
- Such expenditures are often irreversible and cannot be undone without being subject to losses. For instance, most firms invest in capital equipment that is customised as per their requirements. Consequently, such customised materials and machinery do not bode well in the general capital market.
- Typically, capital expenditures incurred by firms based in industries like – manufacturing, telecom, production, oil exploration, etc., are quite high in terms of value. Investing in physical assets like – PP & E generates profit in the long term. However, the initial cost of investment is significantly high. Furthermore, with the advancement of technology, capital cost also tends to increase.
- CAPEX is also responsible for increasing the asset account of business organisations. Nonetheless, once capital assets are put to use, they begin to depreciate, and as a result, their value continues to decrease.
- The capital expenditure of some companies tends to be higher than others. As a result, financial analysts and investors choose to compare the CAPEX of one company with another operating in the same industry to gain a better idea.
FAQs
CapEx vs. Operating Expenses (OpEx)?
Capital expenditure shouldn’t be confused with operating expenses (OpEx). Operating expenses are shorter-term expenses that are required to meet the ongoing operational costs of running a business. Operating expenses can be fully deducted from the company’s taxes in the same year in which the expenses occur, unlike capital expenditures.
An expense is considered to be CapEx when the asset is a newly purchased capital asset or an investment that has an expected life of more than one year or it improves the useful life of an existing capital asset. The cost is typically deducted fully in the year the expense is incurred, however, if the expense maintains the asset in its current condition, such as a repair.
Difference Between Capital Expenditure and Revenue Expenditure ?
The table below offers a fair idea about the key differences between capital expenditure and revenue expenditure in a firm –
| Parameters | Capital Expenditure | Revenue Expenditure |
| Definition | Capital expenditure is the cumulative expense incurred for acquiring capital assets or for upgrading the existing ones. | Revenue expenses are incurred for regulating everyday business activities. |
| Duration | Such expenses are mostly long-term in nature. | Revenue expenditure is incurred for the short term. |
| Accounting treatment | It appears in the Cash Flow Statement of a company. In a Balance Sheet, it appears under the header of fixed assets. | It appears on the Income Statement of a firm and is not reported on the balance sheet. |
| Capacity | Typically, such expenses are incurred to improve a firm’s earning capacity. | Such expenses are incurred to sustain earnings. |
| Advantage | These expenses yield benefits over a substantial period. | The benefits derived are limited to the current accounting year. |
| Occurrence | Such expenses are non-recurring. | They are incurred frequently. |
| Capitalisation | Capital expenditures are capitalised. | These expenses are not capitalised. |
| Treatment of depreciation | Depreciation is charged on capital expenditure every year. | Depreciation is not charged on revenue expenses. |
Practice area's of B K Goyal & Co LLP
Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Demand Notice | Psara License | FCRA Online
Company Registration Services in major cities of India
Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore | Company Registration in Chennai | Company Registration in Kolkata | Company Registration in Mumbai | Company Registration in India | Company Registration in Gurgaon | Company Registration in Noida | Company Registration in lucknow
Most read resources
tnreginet |rajssp | jharsewa | picme | pmkisan | webland | bonafide certificate | rent agreement format | tax audit applicability | 7/12 online maharasthra | kerala psc registration | antyodaya saral portal | appointment letter format | GST Search Taxpayer | caro 2020 | Challan 280 | itr intimation password | internal audit applicability | preliminiary expenses | mAadhar | e shram card | aaple sarkar portal | epf activation | scrap business | brsr | depreciation on computer | west bengal land registration | traces portal | Directorate general of GST Intelligence | form 16 | rtps | patta chitta
