Capital Expenditure

Capital Expenditure is the amount spent on purchasing fixed assets or raising the value of fixed assets. An example of capital expenditure is the money spent on acquiring land, buildings, machinery, furniture, etc.

• Fixed assets are used for earning income and are not meant for resale. Fixed assets can be both physical and intangible.
• Capital Expenditure generates benefits over the course of time, i.e. the benefit of such expenditure goes beyond the accounting period.
• Capital expenditure either enhances a company's earnings or productivity or decreases its operating expenses.

Examples of Capital Expenditure are as follows:

1. Expenses spent while acquiring or constructing a fixed asset. All expenses spent in making the asset for use are capital expenditures and are hence added to the asset's cost. Expenses can include wages given to workers for constructing machines, shipment paid on purchasing plant and machinery, over-hauling of second-hand machinery, and so on but it excludes any such expense, which is paid after the assets have been used.
2. Expenses paid in acquiring the right to start or continue a business, as well as legal expenses incurred in preserving fixed assets. For example, the cost involved in getting a company license, preliminary expenses, and so on.
3. Expense spent for an extension or improvement of a fixed asset to improve its earning potential. Building a cycle shed or canteen in a building, for example, is a capital expense because it is an extension of the building itself.
4. The money spent to purchase a fixed asset, such as a piece of land, building, equipment, motor vehicles, etc. is the most common example of capital expenditure.
5. Expenditure made to acquire "Intangible Assets" like goodwill, patent rights, trademarks, copyright, etc.

Accounting Treatment of Capital Expenditure

Capital Expenditure is added to the cost of fixed assets; i.e., it is debited to the relevant Fixed Asset Account. It is shown in the Balance Sheet.

Illustration:

Determine which of the following is a Capital Expenditure:

1. Custom Duty paid on import of equipment.

2. ₹20,000 paid for electricity bill.

3. ₹1,00,000 spent on repainting the office building.

4. Second-hand machine was purchased for ₹50,000 and ₹3,000 was spent on its installation.

5. Cost of air-conditioning of the Manager's office.

Solution:

1. Custom duty paid on the import of equipment is a Capital Expenditure because the expenditure is incurred to acquire a new asset. It will be shown on the debit side of the Trading Account.

2. ₹20,000 paid for the electricity bill is not a Capital Expenditure because it is a part operating expense. 

3. ₹1,00,000 spent on repainting the office building is not a Capital Expenditure because the fixed assets of the company have not increased by this expenditure.

4. The total expenditure ₹53,000 is a Capital Expenditure because it has resulted in an increase in fixed assets. Installation charges will also be considered as Capital Expenditure as this amount was spent to make the machine ready for use. It will be shown on the debit side of the Trading Account.

5. Cost of air-conditioning of the Manager's office is a Capital Expenditure because the benefit of this will be available to the company for more than one year. It will be shown on the debit side of the Trading Account.

Related Articles:

• Revenue Expenditure
• Capital Receipts
• Revenue Receipts