Capital Expenditures: Learning Objectives: 1.

Define and explain capital expenditures

Expenditure means the amount spent. Any expenditure incurred for the following purposes iscapital expenditure: 1. For acquiring fixed assets such as land, building, plant and machinery, furniture and fitting and motor vehicles. These assets should not be acquired with a view to resell them at a profit but to retain in the business. The cost of fixed asset would include allexpenditure up to the asset becomes ready for use. For making improvement and extensions to the fixed asset e.g., additions to buildings. For increasing the earning capacity of a business or for reducing the cost of manufacture, administration or distribution in a business e.g., expenditure incurred in removing the business to a central locality or compensation paid to retrenched employee. For raising capital monies for the business such as brokerage paid for arranging loans, discount on issue of shares and debentures, underwriting commission etc.

2. 3.

4.

All capital expenditures represent either an asset or liability and are shown in the balance sheet. List of Capital Expenditures - (Examples of Capital Expenditures): The following is a list of the usual items of capital expenditures: Cost of goodwill. Cost of freehold land and building and the legal charges incurred in this connection. Cost of lease. Cost of machineries, plants, tools, fixtures, etc. Cost of trade marks, patents, copy rights, designs, etc. Cost of car, lorry etc. Cost of installation of lights and fans. Cost of any other assets acquired by way of equipment. Erection cost of plant and machinery. Cost of addition to existing assets. Structural improvements and alteration in the existing assets. Expenses for developments in case of mines and plantations. Expenses for administration incurred during construction and equipment of any industrial enterprise. Expenses incurred in experimenting which finally result in the acquisition of a patent or other rights. Capital Expenses or Expenditures are payments by a business for fixed assets, like buildings and equipment. Capital expenses are not used for ordinary day-to-day operating expenses of a business, like rent, utilities, and insurance.

Another way to consider capital expenses is that they are used to buy assets that have a useful life of more than one year.

For example, if you buy office supplies for your business, that purchase is an operating expense, because office supplies don't typically last more than one year (although you may have those boxes of staples lying around for a long time). On the other hand, if you buy office furniture, it is expected that it will last longer than a year, so you are buying a fixed asset, and that purchase is considered a capital expense.

For tax purposes, capital expenditures are typicallydepreciated, but under Section 179 of the IRS code, under certain circumstances some capital expenditures may be considered current operating expenses.

A Capital Expenditure is money a company spends to acquire or upgrade a businessasset. Common examples of a capital expenditure include the purchase of a new building, or the cost of significant upgrades to the equipment in an existing facility. In accounting, a capital expenditure is "capitalized", which means the cost or value of the underlying asset is adjusted for tax purposes and will now include the capital spent to upgrade it. A capital expenditure is considered to be deductible for tax purposes, because it represents an improvement to the business. But it cannot be deducted all at once, in the year in which the money was spent, if the property acquired or upgraded has a useful life longer than the taxable year. In this situation the capital expenditure is subject to Depreciation and Amortization and is deducted over the expected life of the item, rather than all at once, which is what happens with repair or maintenance expenditures. Purchases of fixed assets and purchases made to upgrade fixed assets are the two different types of capital expenditures (capex). Fixed assets are physical property with a useful life that extends far beyond the current year. The property also has to be of a certain nature to qualify as a fixed asset rather than a current asset. Physical property treated as a fixed asset has to have a quality of permanency, such as real estate or major machinery, rather than something that may have a useful life of many years but that is easily moved or sold, such as a computer printer. The fixed assets category is commonly referred to on a budget as property, plant, and equipment (PP&E). Business expenses must be correctly categorized for accounting and tax purposes. Assets that a company acquires during a fiscal year can either be treated as current or fixed, which affects how the asset is treated for tax purposes. An asset is considered current if it used up in the current or subsequent year or can easily be converted to cash. The expense to acquire a current asset is written off on the company's books in the year the asset is acquired. A fixed asset is property that has a long useful life and cannot be easily sold or converted into cash. This type of property cannot be expensed in the year it is acquired. The tax code requires the cost of fixed assets to be amortized over its useful life, meaning the entire cost has to be spread out over the years the property will be used and an equal portion is deducted every year. Property depreciates each year, which is another expense the company has to record in its accounting system. Capital expenditures are monies spent on PP&E. There are two types of cash outlays that will qualify the expense as capital for tax purposes. If a company buys anything that is considered a fixed asset, the expense is a capital expenditure. Expenses to upgrade a fixed asset or extend its useful life are also considered capital. Any outlay of money to acquire a current asset is instead considered an operational expenditure (opex).

The importance of classifying capital expenditures is primarily related to tax treatment, but it has other implications for a company's financial operations as well. Businesses operate according to a yearly budget, and operational budgets manage cash flow over the course of a fiscal year. Fixed assets are carried separately on a capital budget that only reflects capital expenditures. Buying or developing PP&E typically requires large outlays of cash, complex financing, and an acquisition plan that spans multiple years, which requires management to identify assets upfront so they can be properly accounted for iin the company's financial plan.

Definition of Investment'

'Capital

Funds invested in a firm or enterprise for the purposes of furthering its business objectives. Capital

investment may also refer to a firm's acquisition of capital assets or fixed assets such as

manufacturing plants and machinery that is expected to be productive over years.

many

Sources

of

capital

investment are manifold, and can include equity investors, banks, financial institutions, capital and venture angel

investors. While capital investment is usually

earmarked for capital or long-life assets, a portion may also be used for working capital purposes.

Investopedia explains 'Capital Investment' Capital investment encompasses a wide variety of funding options. While funding for capital investment is generally in the form of common or preferred equity issuance, it may also be through straight or convertible debt. It may range from an amount of less than $100,000 in seed financing for a start-up to amounts in the hundreds of millions for massive projects in capital-intensive sectors like mining, utilities and infrastructure. Five Chart Patterns you need to know Definition: The term Capital Investment has two usages in business. Firstly, Capital Investment refers to money used by a business to purchase fixed assets, such as land, machinery, or buildings. Secondly, Capital Investment refers to money invested in a business with the understanding that the money will be used to purchase fixed assets, rather than used to cover the business' day-to-day operating expenses. If you are seeking investors for your business, you will most likely find that interested investors prefer to make a Capital Investment, specifying what the money will be used for. Also Known As: Venture capital. Common Misspellings: Captial investment, capitol investment, capetal investment. Examples: Jenna agreed to make a capital investment in Bupinder's new business, specifying that the money was to be used to buy the machinery needed to start production.