Updated: Jun 28, 2023
Also known as capital expenses or CapEx, a capital expenditure is the amount a company invests in acquiring or maintaining long-term physical assets, like refurbishing a warehouse or purchasing a fleet of delivery trucks. These are major expenses that will continue benefiting the company for years to come, as opposed to operating expenses (OpEx) that support more immediate business needs.
A company’s total CapEx can be found on their Statement of Cash Flows under the ‘Investing Activities’ section, while the depreciation (or decrease in value over time) is placed under the ‘Operating Activities' section.
Capital expenditures are the costs associated with buying, upgrading, or extending the life of physical assets that bring long-term value to a company. They are made up of items within the category of property, plant, and equipment (PP&E). Common PP&E examples include:
Buildings
Office furnishings
Computers
Machinery
Unlike operating expenses which are deducted from a company’s income the same year as they are purchased, investments in physical assets are thought of differently. By definition, a capital expenditure is one that lasts for over a year, like a piece of heavy machinery. How will you account for the long-term value it will afford your business? This is something that can be thought about even in the very early days of starting a business and setting up your bookkeeping planning.
That’s where calculating CapEx comes in. To determine this number, take into account:
Your current PP&E value from purchases this accounting period
The current depreciation value
Your old PP&E value from the last accounting period
You current depreciation value is found by dividing the value of your assets divided by their useful life. In the United States, the useful life for common property, plant, and equipment expenses is set by the IRS (Internal Revenue Service).
Once you have all of those numbers on hand, apply them to the CapEx formula:
CapEx = PP&E value (current accounting period) - PP&E value (prior accounting period) + Depreciation (current accounting period).
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