What is Capital Expenditure?

Capital Expenditures are those expenditures that are incurred to acquire fixed assets or to increase or to add value to an existing fixed asset. Fixed assets include both tangible as well as intangible assets. These assets are not meant for the purpose of resale and are used in the business to generate revenues. Capital expenditure is not incurred on regular basis and the amount of this expenditure is relatively higher than the revenue expenditure.

The capital expenditure results in an income or benefits for a longer period that extends for a period of more than a year. This expenditure is shown in the Balance Sheet on the Assets side. Some of the examples of such expenditures are the purchase of plants, furniture, vehicles, goodwill, wages paid for the extension of land, wages paid for constructing additional rooms in a building, etc.

Capital Expenditure Examples

Some examples of capital expenditure are as follows:

a) When a fixed asset is acquired by the firm like furniture, machinery, land & building, motor vehicles, etc.
b) When expenditure is incurred on making a fixed asset operational like installation charges on the machinery, freight, and carriage paid on the fixed asset, etc.
c) When any modification is made to an existing fixed asset like adding a floor to the building or construction of offices, etc.
d) When an intangible asset is purchased like patents, trademarks, copyrights, Goodwill, etc.

Features of Capital Expenditure

The given below are some features of capital expenditure.

i. This is incurred to purchase the fixed assets or to add the value to an existing fixed asset. Fixed assets include both tangible assets such as building, plant, etc., and intangible assets such as patents, goodwill, copyrights, etc.

ii. It results in improving the working capacity and also increases the earning capacity of an organization.

iii. Assets purchased are not meant for resale in the business.

iv. It is non-recurring in nature i.e. it is not incurred on regular basis.

v. The benefits from this expenditure are availed for a period of more than an accounting year.

vi. This expenditure includes all the expenses that are incurred at the time of purchase of assets or to make the asset in ready-to-use condition. Some of the examples are the cost of installation of assets, erection charges, overhauling of existing or second-hand assets, legal expenses/registration, interest on loan taken to acquire fixed assets, carriage, preliminary expenses for obtaining a license, etc.

vii. It is shown on the Assets side of the Balance Sheet.

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