Capital Expenditure

1. Capital Expenditure

Capital Expenditure is expenditure whose benefit is NOT exhausted in the accounting year in which it is incurred — it yields benefit over several future accounting years. Because the benefit is long-term, capital expenditure is not charged fully to the Profit and Loss Account in the year it is incurred; instead it is capitalised — shown as an asset on the Balance Sheet — and its cost is spread over its useful life through depreciation.

Categories of Capital Expenditure, with examples:

1. Acquisition of a fixed asset — purchase of land, building, plant and machinery, furniture, motor vehicles.
2. Addition or extension to an existing fixed asset — building an extra floor on an existing building, adding a new wing to a factory.
3. Expenditure that increases the earning capacity of a business — installing a more efficient machine that increases production capacity, expenditure on a new sales outlet.
4. Expenditure to acquire a right — purchase of a patent, copyright, trademark, or goodwill; expenditure on obtaining a licence.
5. Expenditure to bring a second-hand or existing asset into working condition — legal charges paid on the purchase of a building (these are added to the cost of the building, not treated as a separate legal expense), cost of installation and erection of machinery (added to the machine's cost), overhauling expenses of a second-hand machine bought to make it usable.