Capital Expenditure Definition, Example and Importance
Capital Expenditure Definition – “Payment to acquire or improve a capital asset”.
In other words, Capital expenditure is the expenditure which results in acquiring the permanent assets for the company. These are those assets which results in inflow of cash flows in the future. So, the expenditure incurred on assets which results in earning of revenue for the company.
Such expenditure are non – recurring in nature that is entity spend only once or twice in such assets for a longer period of time. These are those expenditure whose benefit is not restricted to a single accounting period. Instead capital expenditure results in providing benefits for 3 to 5 accounting periods or sometimes even more.
In addition to this, an expenditure which is done to either increase the profit earning capacity of the firm or reducing the cost of production are known as capital expenditure. One more important thing to note is that, the amount of money spend in making the asset useful for business is also included under the capital expenditure.
Example of Capital Expenditure
To understand the capital expenditure definition more clearly, let’s discuss an example –
Suppose ABC company has purchased a Machinery of Rs. 10,00,000 for manufacturing shoes whose estimated life is 10 year in the FY 2017. This type of cost incurred is known as capital expenditure. As the company will avail the benefit for not only this Financial year but in next 10 financial years as well.
Now again assume, installation of machinery results in costing of Rs. 10,000 to the company. So the total cost of purchasing the machinery will be 10,00,000 + 10,000 = 1,10,000
Related Financial Terms of Capital Expenditure
- Financial Leverage Definition – Meaning Example and Importance
- Net Income Definition | Formula | Example | Importance
- Capital Gains Tax
Importance of Capital Expenditure
The most important advantage of the capital expenditure is that it is a non recurring expenditure. Firms do not require to spend money every year on it. Secondly, the benefits that firm derives from the capital expenditure are profitable for the company for not just one year but for many upcoming years.