Capital expenditure refers to the expenses (Also see How to Track the Expenses and the Benefits It Brings to Your Business) that a company has spent on the purchase of assets in a particular period of time. To calculate this, the accountants from an accounting firm in Johor Bahru will sum up the net increase in the plant, property and equipment value as well as the depreciation expense incurred in the financial year.
In other words, capital expenditure is the financial expenses incurred to purchase (Also see Journal Entries for Credit Purchases), maintain or improve the company’s fixed asset base. These fixed assets can include plant, property and equipment and so on. This means that the only purpose for the expenditure is to acquire new fixed assets, repair the existing ones to increase their useful life, or to upgrade the capacity of those assets to improve their performance.
When recording capital expenditure, the accountants will capitalise the full amount of capital expenditure in the company’s balance sheet under the asset section. Hence, the amount of cash that a company owns will reduce, and there will be an increase in the company’s non-current asset base.
Throughout the useful life of the asset, the accountants will depreciate (Also see Journal Entries for Accumulated Depreciation) or amortise the capital expenditure in the company’s income statement. Besides, as they have recorded the reduction of cash in the balance sheet when the taxable year has come to an end, this transaction will appear in the statement of cash flow too. They will record such transactions under the section of investing activities as the purchase of PPE (property, plant and equipment) or capital spending.
As all sectors may have different nature, some of them are more capital-intensive, while some others are less capital-intensive. Thus, the industry that a business is operating in will affect its capital expenditure. Some capital-intensive sectors, for example, the utility industry and oil refinery industry, may incur a great amount of capital expenditure within a certain period.
In conclusion, capital expenditure is the spending of funds to buy, maintain or improve the long-term assets of a company so that it can improve the capacity or efficiency of its operations. Business owners will see the capital expenditure in the section of investing activities of the statement of cash flow (Also see What Does Negative Cash Flow Mean?). Typically, most companies will try their best to maintain historical capital expenditures as a piece of evidence that their managers are investing the funds effectively in the business.