Capital expenditures, or capex, is spending on fixed assets which are purchased for long-term use. This can be viewed as an investment in a business that isn't immediately expensed but is depreciated or amortized over the useful life of the asset. Capital expenditures can be contrasted with operational expenditures, or opex, that are immediately expensed. The following are illustrative examples of capital expenditures.
LandLand is a special type of capital expenditure as its value doesn't typically deprecate because it generally doesn't go down in value. In cases such as mining, land is depleted of natural resources. This is accounted for with an expense known as depletion.
Land ImprovementsLand improvements is work to improve the value of land such as a road or a garden. Unlike land, land improvements may have a useful life such that they can be capitalized and deprecated. Other land improvements are viewed as preparing the land for use such that they are capitalized as land and not deprecated.
BuildingsAll costs associated with acquiring or constructing buildings.
Legal CostsSome legal fees can be capitalized if they are related to acquiring, registering or constructing a fixed asset.
ComputersComputing hardware such as a computer, data storage or network device.
EquipmentThe cost for equipment used by your business such as a combine harvester for a farm.
MachineryMachinery such as an industrial robot.
VehiclesVehicles such as an electric truck or an aircraft.
InstallationIn many cases, the costs required to operationalize a fixed asset can be capitalized. For example, the cost of installing an solar panel system.
SoftwareSoftware that you purchase or develop for internal use.
Capital ImprovementsWork to improve a fixed asset such as an office renovation or equipment refit.
MaintenanceSome maintenance is viewed as a regular operational expense but major maintenance may be viewed as a capital improvement. For example, painting the walls of a movie theater may be viewed as opex but renovating the theatres may be viewed as capex.
Mergers & AcquisitionsThe rules for capitalizing the expense of a merger or acquisition are complex. Some costs are immediately expensed and others can be capitalized.
Intangible AssetsSpending to organically develop your own intangible assets often aren't capitalized. For example, you can't capitalize advertising to build brand value or research & development costs (see note below). Some internal costs for intangible assets such as legal fees for registering a patent can be capitalized. If you purchase an intangible asset such as a patent from someone else this may be capitalized as goodwill and amortized.
NotesHistorically, it was common for research & development to be capitalized but this is no longer the case. This is a criticism of current accounting and tax rules as research & development clearly produces future value. There is a lot of accounting overhead involved in capitalizing assets. For this reason, firms establish a capitalization limit whereby purchases of fixed assets below a certain threshold cost are expensed. For example, a firm with a $2000 capitalization limit would simply expense the purchase of a $1900 computer.
This is the complete list of articles we have written about business costs.
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