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Capital expenditures (CAPEX)

Capital expenditure (CAPEX) is the money spent on acquiring, upgrading, and maintaining physical assets such as property and plant facilities, technology, or equipment used to conduct a business. Companies invest in capital spending for many reasons, including expanding into new markets, improving existing products and processes, and increasing production capacity.

What are the different types of CAPEX?

Capital expenditures include buildings, equipment, vehicles, and other items that increase the value of a company over time. A few examples of CAPEX include:

  • Buildings: A building may be owned outright or leased. If the building is owned, the purchase price includes the cost of construction plus interest payments. If the building is leased, the lease payment represents the rental income. Either way, the building becomes part of the company’s property portfolio.
  • Machinery and equipment: This type of CAPEX includes tools and machines needed to produce goods. They usually require regular maintenance, and therefore, must be replaced periodically. Purchasing new equipment often requires a substantial initial investment.
  • Vehicles: Cars, trucks, vans, motorcycles, boats, airplanes – vehicles can help companies transport people and cargo. Depending on the vehicle’s purpose, the purchase price may include the cost of the vehicle itself, along with insurance and registration fees.
  • Other capital items: Companies have many assets besides buildings, machinery, and vehicles. Some examples include computers, furniture, fixtures, and even patents.

What is the difference between OPEX and CAPEX?

Operating expenses (OPEX) and capital expenses (CAPEX) are two distinct categories of business expenses that should not be confused with one another because they have significant differences and are both subject to separate tax laws.

On one hand, operating expenses (OPEX items) refer to business expenses incurred to meet day-to-day operational needs. These are short-term and include operational costs like rent, utilities, salaries, and insurance. Additionally, they can be entirely deducted from a company’s taxes during the same accounting period that they occurred.

On the other hand, capital expenditures (CAPEX items) cover longer-term items that are intended to benefit the company in the future. Some examples of CAPEX include buildings, computers, vehicles, and furniture, among others. These expenses are usually paid out over several months or even years and canbe fully deducted in the period they were incurred.

Further reading

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