 Sam
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 Posted: Sat Apr 10, 2004 4:17 am Post subject: Capital Expenditure: Cost of acquisition/upgrading of assets |
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Capital expenditure includes the expenses incurred for aquisition or upgrading of long-term physical assets such as property, new equipment, car, furniture, machinery etc. This is also known as CAPEX. The funds may be used for either real property or tangible property purchase. While accounting, such capital expenditure is added to an asset account, that is, it is capitalized.
Capital expenditure is not deductible for the purpose of income tax and it is generally added on the basis of property. Such expenditure is of a non-recurrent nature and usually continues for more than one year, that is, it provides benefit for more than one accounting period.
Expenses incurred on improvements made to enhance the property-value are also included within the capital expenditure. This is quite unlike repair which is necessary for only maintaining the property. One needs to subtract the repairing expenses all at once. Capital expenditure, however, needs to be depreciated over the period during which it is in use.
If the capital expenditure concerns the purchase of an asset, then it should be treated as a separate asset. This is because it is expected to benefit for a period greater than the current period. The depreciation needs to be estimated as per the rules which are applicable for such asset in the year the expenditure is undertaken for making improvements.
Expenditure on structural repairs should be classified as capitalized expenditure. Generally, the expenditure on fixed assets should be considered as capitalized in the following cases:
- Expenditure is incurred for improvements that can increase the life of an asset or enhances the market value of an asset or increases the utility of the asset.
- Expenditure is made regarding the restoration or replacement of a separate component.
- The expenditure concerns major inspection or upgrading of an asset which restores benefits already consumed and it should be reflected in depreciation.
However, capital expenditure does not include painting, repairs (of vehicles, machinery etc.) and cyclical maintenance of buildings to ensure that buildings preserve their existing state. |
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