Capital Expenses

The outflow of money i.e. expenses incurred on procuring (buying), installing, or bringing capital asset (i.e. fixed assets) into a function (maintenance or improvement costs) is known as capital expenses.

 

Types of Capital Expenditure

  • Building and Property - Capital purchases, like building upgrades or property acquisitions, serve a long-term purpose and are often financed through secured debt or mortgages.

  • Equipment upgrades - Upgrades in equipment may be necessary and are subject to depreciation if costs exceed the capitalization limit.

  • Software upgrades - Software expenditures, including upgrades, are considered capital spending and can be depreciated based on specific criteria.

  • Computer equipment - Computer equipment, vehicles, and intangible assets like patents can be classified as capital expenditures.

  • Vehicles - Companies need vehicle fleets for distribution or services, like delivery. These vehicles are capital expenditures. Leasing vehicle costs, however, are treated as operational expenses.

  • Intangible assets - Capital expenditures aren't limited to physical or tangible assets; they can also include intangible assets. 

Capital Expenditure Formula

The Capital expenditure formula from the income statement and balance sheet is:

CapEx = PP&E (current period) – PP&E (prior period) + Depreciation (current period)

This formula is based on the logic that the current period PP&E on the balance sheet equals the prior period PP&E plus capital expenditures minus depreciation.

 

Capital Expenditure Examples 

Let us take the example of the company ABC Ltd and the calculation of capital expenditure in 2022 based on the following information:

  • Depreciation expense is Rs.10,500 in the income statement

  • PP&E value at the end of 2022 is Rs.45,500 on the balance sheet

  • PP&E value at the beginning of 2022 is Rs.40,000 on the balance sheet

  •  

Therefore,

Net increase in PP&E = PP&E value at the end of 2022 – PP&E value at the beginning of 2022

 

Capital Expenditure (capex) Formula = Net increase in PP&E + Depreciation expense

Therefore, the calculation of Capital Expenditure incurred during 2022 is Rs.16,000.