A capital expenditure is an outlay of cash by a company for the purposes of acquiring, improving, or maintaining long-term assets. These assets may include physical property such as land, buildings, machinery, and equipment, or intangible assets such as intellectual property or technological innovations.
The accounting treatment of a capital expenditure depends on the accounting method used by the company. Generally speaking, under accrual accounting methods, a capital expenditure is recorded as an asset on the balance sheet, and the associated costs are spread out over the useful life of the asset.
Under cash accounting methods, on the other hand, a capital expenditure is only recorded on the balance sheet when it is actually paid for. This can lead to fluctuations in the accounting treatment of capital expenditures from one period to the next, depending on the timing of cash outlays.
In either case, it is important to carefully track capital expenditures, as they can have a significant impact on a company’s financial position and bottom line. Proper accounting for capital expenditures can also be critical in tax planning and decision-making.