A capital expenditure is one in which a durable asset is purchased that is intended to increase the profits of a business for an extended period. That is in contrast to a consumable which is depleted as it is used and must be replaced. Consumables are treated as an expense.
Capital expenditures can be of various types including land, the construction of a new plant, or the installation of new equipment. Rules that determine what can be capitalized can be complex. For example remodelling a plant often can be capitalized. So can certain expenses after an acquisition, such as moving expenses for employees.
Tax laws allow some capital assets to be depreciated. Depreciation recognizes that the equipment gradually wears out and must be replaced. Hence, a portion of its cost is allocated as a business expense. The effect is to protect a portion of the firm's income from taxes and to provide funds for reinvestment in the business.
Recent Mentions on Fool.com
- 3 Energy Companies That Will Do Well Despite Low Oil Prices
- The Big Fat Greek Crisis
- Celgene Corporation's $4 Billion Bet That Its Stock Is Cheap
- Is Now the Right Time to Buy McDonald's Corporation Stock?
- Stocks to Watch for Low Oil Prices
- How to Decode Realty Income Corporation's Income Statement and Balance Sheet