Capital Expenditures / Capital Cost

Capital Expenditures:

Learning Objectives:

  1. Define and explain capital expenditures / Capital Cost

Expenditure means the amount spent. Any expenditure incurred for the following purposes is capital 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 all expenditure up to the asset becomes ready for use.

  2. For making improvement and extensions to the fixed asset e.g., additions to buildings.

  3. 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.

  4. For raising capital monies for the business such as brokerage paid for arranging loans, discount on issue of shares and debentures, underwriting commission etc.

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.

You may also be interested in other articles from “capital and revenue” chapter:

  1. Capital Expenditures
  2. Revenue Expenditures
  3. Difference Between Capital and Revenue Expenditures
  4. Capital and Revenue Receipts, Payments, Profits and Losses
  5. Exceptions to the General Rules and More About Capital and revenue Expenditures

Other Related Accounting Articles:

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  1. asad May 11, 2014
  2. asad May 11, 2014

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