Capital expenditure - What is capital expenditure (CapEx)?
Capital expenditure is the money used to purchase, maintain, or improve fixed assets such as equipment and property.
CapEx is calculated using PP&E and depreciation. Learn more about the different depreciation methods in order to calculate the correct capital expenditure.
Capital expenditure is included on the statement of cash flows and can be calculated using information from a company’s balance sheet and profit & loss statement.
CapEx includes any cost related to the purchase or maintenance of the asset including legal costs related to the purchase, delivery costs on equipment, and interest incurred on construction.
It is important to note that capital expenditure is not related to the owner’s capital account. While capital relates solely to the owners, CapEx relates solely to the business.
Capital expenditure formula
Capital expenditures are calculated using the property, plant & equipment (PP&E) costs and the current depreciation.
Capital Expenditure = Change in PP&E + Current Depreciation
The change in PP&E is calculated by subtracting the previous period’s property, plant & equipment costs from the current period’s amount. This data can be found on the balance sheet.
The current depreciation can be found on the company’s profit & loss statement.
Example of capital expenditure
John runs a small marketing firm and an office was purchased when the company began. After a few years, the company had gained several clients meaning that John needed to hire more employees. As a result, John decided to purchase the office next door to have space for the new employees. This office is currently in use by another company.
Since the office is currently in use by another company, it would not be considered as a fixed asset being brought into use for the first time. However, since the expenditure improves the original office capability, it would be considered as capital expenditure.
Since the extension of the original office creates opportunities for more employees, and the useful life of the new asset is greater than one year, expenses related to this project can be recorded as capital expenditure.
Difference between capital and revenue expenditure
Capital expenditures are costs related to fixed assets that are expected to be useful to a company for a long period of time (generally over 1 year), such as property or machinery. They are not normal, repeated costs over a long period, but generally large expenses to grow the business.
Revenue expenditures, on the other hand, are costs related to normal business operations, such as rent, utilities, salary payments, printing, etc.
Therefore, capital expenditures are for long-term assets, whereas revenue expenses are for short-term, usually recurring, operational expenses.
Capital expenditure and invoicing software
Invoicing software is a useful tool to keep track of all of your business finances. With Debitoor, you can keep track of your invoices, record expenses, and review your important accounting reports.
With Debitoor, you can easily find your PP&E and depreciation data to calculate the capital expenditure. Feel free to give it a try with our 7-day trial.