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Capital expenditure orcapital expense (abbreviatedcapex,CAPEX, orCapEx) is the money an organization or corporate entity spends to buy, maintain, or improve itsfixed assets, such as buildings, vehicles, equipment, or land.[1][2] It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairing the roof.[3]
Capital expenditures contrast withoperating expenses (opex), which are ongoing expenses that are inherent to the operation of the asset. Opex includes items likeelectricity or cleaning. The difference between opex and capex may not be immediately obvious for some expenses; for instance, repaving the parking lot may be thought of inherent to the operation of ashopping mall. Similarly, the costs ofsoftware for a business (eithersoftware development orsoftware as a service licensing) might fall into either opex or capex (that is, is it merelybusiness as usual, or is it something new, aninvestment with multiyearreturn?). The dividing line for items like these is that the expense is considered capex if the financial benefit of the expenditure extends beyond the currentfiscal year.[4]
Capital expenditures are funds used to acquire or upgrade a company’s fixed assets, such as property, plant, and equipment (PP&E).[3] In many companies, major capital expenditures require formal approval from theboard of directors, depending oncorporate governance rules or internal bylaws.”[5] Inaccounting, a capital expenditure is added to an asset account, thus increasing the asset'sadjusted basis (the cost or value of an asset adjusted for tax purposes). Capex is commonly found on thecash flow statement under "Investment in Property, Plant, and Equipment" or a similar line item within the investing activities section.[6]
For tax purposes, capex is a cost that cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized.[citation needed] The capital expenditure costs are thenamortized ordepreciated over the life of the asset in question. Further to the above, capex creates or adds basis to the asset or property, which once adjusted, will determine tax liability in the event of sale or transfer. In the US, Internal Revenue Code §§263 and 263A deal extensively with capitalization requirements and exceptions.[7]
Included in capital expenditures are amounts spent on:
An ongoing question for the accounting of any company is whether certain costs incurred should becapitalized orexpensed. Costs which are expensed in a particular month simply appear on thefinancial statement as a cost incurred that month. Costs that are capitalized, however, are amortized or depreciated over multiple years. Capitalized expenditures show up on the balance sheet. Most ordinary business costs are either expensable or capitalizable, but some costs could be treated either way, according to the preference of the company. Capitalized interest if applicable is also spread out over the life of the asset. Sometimes an organization needs to apply for a line of credit to build another asset, it can capitalize the relatedinterest cost.Accounting Rules spreads out a couple of stipulations for capitalizing interest cost. Organizations can possibly capitalize the interest given that they are building theasset themselves; they can not capitalize interest on an advance to buy the asset or pay another person to develop it. Organizations can just perceive interest cost as they acquire costs to develop the asset.
The counterpart of capital expenditure isoperating expense oroperational cost (opex).
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