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Capital expenditures

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.

Expanded Definition

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.

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