Many entrepreneurs assume that capital expenditures are the same as expenses. While they can be classified as expenses, this doesn’t apply to all of them. Whether you run a small, medium or large business, you should familiarize yourself with the definition of capital expenditures. In this post, we’re going to break down this otherwise common accounting term, revealing it’s meaning and importance for business owners such as yourself.
Overview of Capital Expenditures
Also known as a capital expense, a capital expenditure is money spent towards a product or service for the purpose of improving a business’s long-term fixed assets. It’s not uncommon for businesses to reinvest their earnings back into their operations. When a business spends money on a product or service that extends the usable life of one of its long-term fixed assets, the purpose is considered a capital expenditure.
There are also operating expenses, which are located on the opposite spectrum as capital expenditures. While capital expenditures consist of business-related expenses — specifically those used to improve a fixed asset — operating expenses consist of money paid to acquire or inherit an asset’s operation. The main difference between the two is that capital expenditures are used to improve or extend the life of a fixed asset, whereas operating expenses are ongoing expenses associated with short-term assets.
Examples of Capital Expenditures
Now that you know the basic definition of capital expenditures, let’s take a closer look at some examples of them. Purchasing a fixed asset is a common example of a capital expenditure. If a product or service is designed to facilitate your business’s operations, it’s considered a fixed asset and, thus, a capital expenditure.
Upgrading a current asset used by your business could be considered a capital expenditure as well. A construction company, for example, may upgrade the model of a bulldozer or excavator. Depending on the model, construction companies may spend tens of thousands of dollars on bulldozer upgrades such as this, with each of these transactions being a capital expenditure.
Making repairs to a current asset owned and used by your business can also be considered a capital expenditure. If an asset, such as a machine, is damaged to the point where it adversely affects your business’s operations, you may want to repair it. If you spend money to repair an asset such as this, it’s considered a capital expenditure.
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