What are capital expenditures?

Definition

Capital expenditures are spending to buy or improve assets the business will use for years, not goods it will resell next week. On the books, this is a fixed assets purchase, often shortened to capex, not an operating expense for the month.

A landscape crew reads it when they buy a used dump trailer. The trailer will haul brush for years, so the spend is capitalized instead of being dumped onto this month's profit.

It is a kind of spending, not a ledger account you debit by that name. The books debit the asset and credit cash, or credit a payable if the bill is still open.

Accrual books record the asset when it is acquired. The cash story shows up in the investing section of the Statement of Cash Flows when the cash is paid.

Where it shows up

Balance sheet: Related to the asset going on.

P&L: Related to later depreciation, not to the purchase itself.

Cash flow: Located in the investing section when the cash is paid.

See also: Fixed Assets · Cash Flow From Investing · Capital Budget

When you look at your Statement of Cash Flows, this spend sits in the investing section. Day-to-day fuel and payroll sit above it; loans and owner money sit below it.

When the figure is large, the crew bought trucks, trailers, or other long-lived tools. When it is small, they mostly used what they already had.

The Balance Sheet shows the trailer as a fixed asset after the buy. Property, plant, and equipment is often the grouping that holds it.

The Income Statement does not show the purchase as an expense. Depreciation expense will spread the cost later, over the trailer's useful life.

A capitalization policy is the written dollar threshold that decides asset versus expense. A $40 rake is still a supply; an $8,000 trailer is not.

How it works

The crew pays cash for a long-lived tool, and cash goes down. The other side of the entry is the fixed-asset account, not an expense.

If they buy on account, the asset still goes on and accounts payable goes up. The investing cash outflow waits until the bill is paid.

Read the spend in this order:

• Confirm the buy is a long-lived asset, not a resale item or this week's supply.
• Debit the fixed-asset account (or construction in progress) for the capitalized cost.
• Credit cash if paid now, or credit accounts payable if the bill is still open.
• Treat later depreciation as a separate P&L charge, not as a redo of the purchase.

If they improve an asset they already own, that improvement can be capex too. A new deck on the same trailer is still a long-lived spend, not this week's repair bill.

Stay with the asset purchase when you read the spend. Payroll, fuel, and a $200 hose repair are operating; the trailer is not.

Do not treat the purchase as a hit to this month's profit. The trailer is an asset; depreciation will spread its cost later.

The fixed asset register lists the trailer after it is capitalized. That list is how the shop keeps cost, life, and depreciation in one place.

After the month closes, the next period does not re-record the buy. Only later depreciation, or a later sale, will touch the books again.

Example

Green Shoulder Landscapes buys a used dump trailer for $8,000 cash in April. The crew will haul brush and soil with it for years, not resell it next week.

The books record the buy as a fixed asset and a drop in cash.

Debit: Fixed assets $8,000

Credit: Cash $8,000

That $8,000 is investing cash, not an operating expense. April's profit does not drop by $8,000 because of the trailer.

The Balance Sheet now shows an $8,000 trailer in fixed assets, and cash is $8,000 lower. The investing section on the Statement of Cash Flows shows an $8,000 outflow.

If the crew's policy capitalizes anything over $2,500, this buy is over the line. A $400 blade sharpener in the same month would still be an expense.

If they had put $2,000 down and borrowed the rest, only the $2,000 cash would be this period's capex cash. The loan proceeds would sit in financing, and the full $8,000 trailer would still go on the Balance Sheet.

Common mix-ups

Capital expenditures are not operating expenses. Buying the trailer is an asset purchase; it does not hit this month's profit as a cost.

Capital expenditures are not the same as a capital budget. The budget is the plan; this spend is what actually went out.

Capital expenditures are not depreciation. Depreciation is the later charge that spreads the cost; capex is the buy itself.

Related terms

• Fixed Assets: Long-lived physical assets used to run the business rather than resold.
• Cash Flow From Investing: Cash spent on or received from long-term assets.
• Capitalization Policy: The written dollar threshold and rules for recording a purchase as an asset instead of an expense.
• Capital Budget: The plan for major asset purchases over a period.
• Free Cash Flow: Operating cash flow left after the capital spending needed to keep running.
• Depreciation Expense: The periodic charge that spreads a fixed asset's cost over its useful life.
• Purchase Order: The document authorizing a purchase from a vendor at agreed terms.
• Payback Period: How long it takes an investment to return its own cost in cash.