capital expenditures in accounting
Capital Expenditures-This is an important type of expense. By this article, you are going to understand all about Capital Expenditures such as definition, examples, identification, calculation, types, and more faqs related to Capital Expenditures in accounting terms.
Contents of this post
Capital Expenditure is expenses that generate enduring benefits and helps in revenue generation over more than one accounting period. capital expenditures are placed on the asset side of the balance sheet as they will generate benefits for more than one accounting period and will be transferred to the profit and loss account of the year on the basis of utilization of that benefit in a particular accounting year.
These are the examples of Capital Expenditures
We can know how to identify a capital expense through some examples
Example 1 -Expenses incurred in connection with obtaining a license for starting the factory for Rs. 20,000.
Solution-Money paid Rs. 20,000 for obtaining a license to start a factory is a capital expenditure. This is an item of expenditure incurred to acquire the right to carry on business.
Example 2-Rings and Pistons of an engine were changed at a cost of Rs. 10,000 to get fuel efficiency.
Solution-Rs. 10,000 spent on changing Rings and Pistons of an engine to get fuel efficiency is capital expenditure. This is expenditure on the improvement of a fixed asset. It results in increasing the profit-earning capacity of the business through cost reduction.
Example 3-A factory shed was constructed at a cost of Rs. 1,00,000. A sum of Rs. 5,000 had been incurred in the construction of temporary huts for storing building material.
Solution-Cost of the construction of the building including the cost of temporary huts is capital expenditure. The building is a fixed asset that will generate enduring benefits to the business over more than one accounting period. The construction of temporary huts is incidental to the main construction. Such cost is also capitalized with the cost of building.
you can understand how you can calculate Capital Expenditures through the given examples
For example-if Rs. 30000 is spent on the repair of second-hand machinery and Rs.5000 on freight in connection with its acquisition, then what is the capital expenditure?
Solution– In this question capital expenditure is 30000+5000=35000 Rs.
1- when a second-hand asset is purchased and expenditure is incurred to bring the asset into working order then it is treated as capital expenditure.
2- In the given example, second-hand machinery is purchased and a sum of money is spent upon overhauling repairing and acquiring it. The expenditure on acquisition and overhauling will be considered as capital expenditure.
Capital Expenditures are classified into three categories-
You can know how it is different from revenue expenditure throughout the given table
| S.NO | Capital Expenditure | Revenue Expenditure |
|---|---|---|
| 1 | Capital Expenditure is expenses that generate enduring benefits and helps in revenue generation over more than one accounting period. | The Revenue Expenditures are expenses that relate to the operations of the business during an accounting period. |
| 2 | Long term benefits | short term benefits |
| 3 | Non recurring in Nature | Recurring in Nature |
| 4 | Available for capitalization | Not available for capitalization |
| 5 | It enhances the value of existing assets | It does not enhance the value of existing assets |
| 6 | Has a physical presence except for intangible assets | Does not have a physical presence |
| 7 | It appears as assets in the balance sheet and some portion in the income statement | It always appears in the income statement |
| 8 | Do not reduce business revenue | It reduces business revenue |
| 9 | Examples- software, building, vehicle, etc. | Examples- Rent, Electricity bills, salary, etc. |
Capital expenditures refer to funds that are used by a company for the purchase, improvement, or maintenance of long-term assets to improve the efficiency or capacity of the company. Long-term assets are usually physical, fixed, and non-consumable assets such as property, equipment, or infrastructure, and that have a useful life of more than one accounting period.
The expenditures that are incurred by an organization for long-term benefits are known as capital expenditures. These expenditures serve the purpose of increasing the capacity or capabilities of the long-term asset by either enhancing or adding new assets to the organization.
Answers are
Q1-Expenses incurred in connection with obtaining a license for starting the factory for Rs. 20,000.
(a) Capital receipt
(b) Revenue receipt
(c) Capital expenditures
Ans. (c) Capital expenditures
Capital expenditures are also known as CapEx or capital expenses. Capital expenditures include the purchase of items such as new equipment, machinery, land, plant, buildings or warehouses, furniture and fixtures, business vehicles, software, or intangible assets such as a patent or license.
Decisions on how much to invest in capital expenditures can often be extremely vital decisions made by an organization. They are important because of the following reasons:
these are the challenges in capital expenditure-