Capital expenditures, or CapEx, refer to the money an organization or corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. Capital expenditures are considered an investment by a company in expanding its business and are capitalized on the balance sheet, meaning they are not expensed directly on a companys income statement. Capital expenditures are used to undertake new projects or investments by a company and can include repairing an existing asset so as to improve its useful life, purchasing a piece of equipment, or building a new factory. Capital expenditures are different from operating expenses, which recur on a regular and predictable basis, such as rent, wages, and utility costs.
Capital expenditures are characterized as very expensive, especially for companies in industries such as manufacturing, telecom, utilities, and oil exploration. Capital investments in physical assets like buildings, equipment, or property offer the potential of providing benefits in the long run but will need a large monetary outlay initially. Capital expenditures have an initial increase in the asset accounts of an organization, but once capital assets start being put in service, depreciation begins, and the assets decrease in value throughout their useful lives.
The decision of whether to expense or capitalize an expenditure is based on how long the benefit of that spending is expected to last. If the benefit is less than one year, it will be expensed directly on the income statement. If the benefit is greater than one year, it must be capitalized as an asset on the balance sheet.
Calculating capital expenditures can help companies avoid going over their allotted budget when spending money on all types of assets. Companies can measure capital expenditures using their balance sheet, cash flow statement, or income statement. Capital expenditures are a key component of the main financial statements: balance sheets, cash flow statements, and income statements.
