What is Capital Expenditure ?
Capital expenditure can be defined as the amount of money or the amount of expense that a company uses to purchase, upgrade, improve or extend the life and the performance of its long term assets. Capital expenditure is usually spent on the long term assets. The example of the long term assets includes property, infrastructure such as a manufacturing unit or equipment that have a useful life more than a year or so.
Example of Capital Expenditure
Let’s take an example of a company that wants to buy a new delivery truck for the delivery of the products to its customers. The worth or the price of the truck is $40,000. The company spends $40,000 to purchase the truck the book value of the assets of the company increase by $40,000. The amount spent on purchasing the truck is recorded as capital expenditure as this the amount that is used for the investment purpose or to purchase an asset for the company. The amount $40,000 is gradually expensed on the income statement of the company as soon as the truck starts depreciating. The length of time and the amount of the depreciation of the truck depends upon the method that company chooses to depreciate the truck.
Threshold for Capital Expenditure
A number of companies set a minimum threshold for capital expenditure in order to expand and improve their investment, business and performance. However the expenses below that threshold are not considered as capital expenses as they are simply termed as expenses. The reason behind this classification is to make the accounting process easy for the accounting managers.
Types of Capital Expenditure
Although there are a number of different types of capital expenditures but mainly it is divided into two major categories and these are the maintenance expenses and the expansion expenses.