11 March 2025
What is Capital Expenditure in Business?
5 minutes
One of the most important questions to answer as you kickstart your new venture is what is Capital Expenditure in my business?
Investing in assets that will support your company’s successful operation and growth is a crucial part of your company’s financial management.
In this article, we’ll take you through precisely what Capital Expenditure (CapEx) is, the different types, and how it works in the real world.
What does CapEx mean?
CapEx or Capital Expenditure is the money you spend on something that boosts your business in the long term.
This includes physical assets, like vehicles, buildings and important pieces of equipment. However, these investments are not the only types of Capital Expenditure your company might make. You may also spend money on research and development of new products and services or intellectual property such as patents. These financial decisions are made with your company’s longer-term future in mind, making them part of your CapEx.
In accounting terms, CapEx is recorded on a company’s balance sheet as an investment rather than on an income statement as an expense. (The balance sheet is a financial statement that lists the assets and liabilities of a company at a specific point in time whereas an income statement shows loss and profit).
CapEx can also be found on the cash flow statement which tracks the cash that flows in and out of your business. It will show the money spent on and generated by any investments you make.
To be recorded as CapEx, the item must be useful to your company for more than one financial year.
In this way, CapEx differs from OpEx (Operating Expenses) predominantly in terms of time frame. While CapEx is related to long-term gain, OpEx refers to the day-to-day running costs of doing business.
Because CapEx is an investment in your business, it’s possible to finance these costs through external funding like bank loans. Many financial institutions call this asset financing or, quite simply, CapEx funding.
For a full breakdown of the difference between CapEx and OpEx, head here.
Types of Capital Expenditure
CapEx can be divided into these main categories:
● Property, Plant, and Equipment (PP&E)
PP&E includes tangible assets that will be in use in your business for a long period (at least one full year). They’re also known as fixed assets. Purchases in this category include buildings, vehicles and machinery.
Because these are vital to the value your business holds and can offer, they should be properly insured. Head here for details on Howden can help you find the asset protection suitable to your company’s needs.
It’s important to note that over time, most items of PP&E will decrease in value, either because they become obsolete or wear down over time. (An exception to this is land which is an asset that is likely to increase in value.)
As a result, each item has what is known as a useful life, the period it will be useful to your business. This helps you determine the item’s depreciation, which will be recorded as an expense on your income statement — essentially a cost of doing business.
As time goes on, your fixed assets may also require maintenance and repair. Whether this is recorded as OpEx or CapEx will depend on whether it significantly increases the asset’s value or life. If so, it’s CapEx. Otherwise, it’s OpEx.
If you sell or get rid of an asset, you’ll have to remove it from the PP&E on your balance statement. You’ll also have to record any profit or loss from the item on your income statement.
● Research and Development (R&D)
Some types of intellectual property such as copyrights and patents can be considered CapEx as they contribute to the overall growth and value of your business.
● Mergers and Acquisitions
If you have spent resources merging with or acquiring other companies, you are likely doing so to grow and develop your business in the long term. The expenses related to these actions are also considered CapEx.
What is an example of a capital expenditure?
Say you want to open a gym. You buy a building and deck it out with the latest exercise equipment. These investments are considered CapEx.
Your next step is to create a brand. You patent both the name and the logo design. The costs incurred in this process are all considered CapEx.
Now you want to look at enhancing your offering by creating an online platform linked to your gym’s exercise classes. The research and development that go into this new part of your business will also be considered CapEx — it’s all purposed towards your company’s long-term growth.
You then decide to merge with the other gym in the neighbourhood. The expenses of this merger could be considered CapEx as they add to the total long-term value of your business.
Capital Expenditure and tax in the UK
The UK offers “capital allowances” for businesses — a kind of tax relief that lets you deduct capital expenditure from your profits before you pay tax on them.
To work out your capital allowances, you will usually value the item according to what you paid for it initially. However, there are situations where you might use the amount you could sell it for (market value) instead. This would include if you had the asset before you used it in your business or were given it as a gift.
Note that accounting for your business assets in this way is not the only option. If you are a sole trader or have a smaller business with an income of less than £150,000, you can use the cash basis system instead. Here, you will only pay tax on the money that your business receives in a tax year.
IMPORTANT NOTE: It’s important to speak to a tax professional to see which system will work best for you and to ensure that you comply with the regulations.
How to calculate CapEx
To calculate how much you have invested into tangible assets in a given period, you need your:
- Income statement
- Balance sheet.
From your current balance sheet, find the:
- Current value (end of period) of your PP&E
- Previous value (beginning of period) of your PP&E
Subtract the previous value from the current value. This will show you how much you have spent on investing in assets over the period.
But the calculation is not complete yet.
You must also consider how much your investments have depreciated — the amounts on your balance sheet (what you spent on the assets) may no longer reflect the actual value of your assets as many of these items may lose value over time.
You will find your current depreciation on your income statement.
Following this, the CapEx formula is as follows:
CapEx = current value of PP&E - previous value of PP&E + current depreciation
Capital Expenditure FAQs
What is the difference between revenue expenditure and capital expenditure?
Revenue expenditure is another term for OpEx — the expenses related to the day-to-day running of a company. CapEx, on the other hand, refers to investments you make with the company’s long-term future in mind. So, the key difference between the two is longevity — is this an item that will be key to your business’s operation and growth for longer than a year? If so, it’s OpEx.
What is the difference between capital expenditures and expenses?
Capital expenditure is recorded on your books as an investment. While you are putting your funds towards it, it is not considered an “expense” in the same way OpEx is. Consider the difference between buying a fridge and keeping it stocked. The former is CapEx, and the latter OpEx.
What is capital expenditure in business? Quickfire summary
Capital expenditure refers to the funds you invest into long-term assets for your business.
Capital expenditure examples include the equipment you purchase, land you buy for your business operations, and vehicles you purchase to keep your company on the road.
However, CapEx is not limited to concrete items. The money you spend on research and development and mergers and acquisitions can also be considered an investment if they are to sustain or grow your business.
Unlike OpEx which are expenses related to the day-to-day running of your company, CapEx is related to the long-term survival and growth of it. That’s why CapEx is recorded as an asset on your company’s balance sheet rather than as an expense.
In tax terms, CapEx offers tax relief. This expenditure falls under capital allowances and will be deducted from your profits before they are taxed.
To ensure that your company’s accounting and tax meet legal requirements and that you’re making the best financial decisions for your business, it’s important to speak to a financial professional.
Also read: