Costs of Capital
Capital expenditures ("CAPEX") are one-time expenses incurred for the purchase of land, buildings, construction of buildings and other assets, and equipment used in the production of goods or in the rendering of services. In short, capital expenditures are the total costs needed to bring a project to a commercially operable status.
Whether a particular cost is a CAPEX or not depends on many factors, such as accounting rules, tax laws, and materiality. CAPEX include expenses for tangible goods, such as the purchase of plants and machinery, as well as expenses for intangibles assets, such as trademarks and software development. CAPEX are not limited to the initial construction of a building or other asset and should include other expense items, such as interest incurred during the construction phase.
The construction of a building requires the use of capital.
The funds used to construct and put a building into use are capital expenditures.
Accounting for Capital Expenditures
A CAPEX cannot be deducted as an expense in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The CAPEX costs are then amortized or depreciated over the life of the asset in question. The following capital expenditures are capitalized:
- Acquiring fixed and, in some cases, intangible assets
- Repairing an existing asset so as to improve its useful life
- Upgrading an existing asset, which increases its value (original cost)
- Preparing an asset to be used in business
- Restoring property or adapting it to a new or different use
- Starting or acquiring a new business
An ongoing question for the accounting of any company is whether certain expenses should be capitalized. Costs that are expensed in a particular month simply appear on the financial statement as a cost incurred that month. Costs that are capitalized, however, are amortized or depreciated 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. Capitalized interest, if applicable, is also spread out over the life of the asset.The counterpart of capital expenditure is operational expenditure ("OpEx").