Capital Expenditure (CAPEX)

Meaning and definition of capital expenditure

The general definition of capital expenditure can be given as the funds utilized by a company for acquiring or upgrading the physical assets like property, equipment, or industrial buildings. This outlay type is created by the companies to maintain or raise the scope of their operations. These expenditures count everything from roof repairing to building a brand new factory. The capital expenditure (CAPEX) includes expenses like building renovations or equipment up gradation of equipment which adds value to the assets of a company. Moreover, the capital expenditures generally depreciate with time and feature a long life.

As explained by Investopedia, the amount of capital expenditures incurred by a company depends upon the industry occupied by it. Some of the most capital intensive industries are telecom, utilities, and oil.

In accounting terms, expenditure is considered as a capital expenditure if the asset is a recently purchased capital asset or an investment that is helpful in improving the useful life of an existing capital asset. Moreover, if expenditure is a capital expense, it should be essentially capitalized, which requires the company to increase the cost of expenditure over the assets’ useful life. However, if the expense is one which assists in maintaining the asset at its present condition, the cost is subtracted fully in the year of expense.

Calculating Capital Expenditure

The following steps are involved in estimation of capital expenditure:

1. Get a copy of the financial statements of your firm. Particularly, the balance sheet is required.

2. Determine the worth of total assets. This is instituted at the bottom of the assets section of the balance sheet. We need the change in total assets from the previous year to the current year.

3. Determine the amount of total liabilities. This amount is also found at the bottom of the liabilities section of a balance sheet, just above the stockholder’s equity. We need the change in total liabilities from the past year to the current year.

4. Deduct the change in total liabilities from the change in total assets. The amount thus obtained indicates the amount spent on the capital for the year.