Capital expenditure (CAPEX) and capitalized expenditure are similar concepts that are often confused. Both refer to the cost of acquiring or improving long-term assets such as property, plant, and equipment. However, there are some key differences between the two.
What is Capital Expenditure?
Capital expenditure (CAPEX) refers to the money a company spends on acquiring or improving long-term assets that are expected to generate revenue for the company over a period of time. These assets are typically used in the company’s operations and include items such as buildings, machinery, equipment, and software.
Examples of CAPEX include:
- Building a new factory
- Purchasing new machinery or equipment
- Renovating a building
- Acquiring a new business
- Investing in research and development
CAPEX is considered a non-current asset on a company’s balance sheet and is depreciated over time, meaning the cost of the asset is spread out over its useful life. This is done to match the revenue generated by the asset with the expenses incurred to acquire it.
CAPEX is typically financed through long-term debt or equity, and companies need to carefully consider the return on investment (ROI) before making a CAPEX investment.
What is Capitalized Expenditure?
Capitalized expenditure refers to the cost of acquiring or improving long-term assets that are not expected to generate revenue for the company but are necessary for the company’s operations. These assets are typically considered indirect costs and are not depreciated over time.
Examples of capitalized expenditure include:
- Research and development costs
- Employee training expenses
- Marketing expenses
- Legal and accounting fees for setting up a new business
- Software development costs
Capitalized expenditure is recorded as an expense on the income statement in the period it was incurred. It is not recorded as an asset on the balance sheet, unlike capital expenditure (CAPEX) which is recorded as a non-current asset and depreciated over time.
Capitalized expenditure is typically financed through operating cash flow, and companies need to carefully consider the cost-benefit of the expenditure before incurring it.
Key Difference
- CAPEX refers to the money a company spends on acquiring or improving long-term assets that are expected to generate revenue for the company over a period of time. These assets are typically used in the company’s operations and include items such as buildings, machinery, and equipment. CAPEX is typically considered a non-current asset on a company’s balance sheet and is depreciated over time.
- On the other hand, capitalized expenditure refers to the cost of acquiring or improving long-term assets that are not expected to generate revenue for the company but are necessary for the company’s operations. These assets are typically considered indirect costs and are not depreciated over time. Examples of capitalized expenditure include research and development, employee training, and marketing expenses.
- One key difference between CAPEX and capitalized expenditure is the way they are treated on a company’s financial statements. CAPEX is typically recorded as an asset on the balance sheet and is then depreciated over time. Capitalized expenditure, on the other hand, is recorded as an expense on the income statement in the period it was incurred.
- Another difference between the two is how they are financed. CAPEX is typically financed through long-term debt or equity, while capitalized expenditure is typically financed through operating cash flow.
In summary
CAPEX refers to the money a company spends on acquiring or improving long-term assets that are expected to generate revenue, while capitalized expenditure refers to the cost of acquiring or improving long-term assets that are not expected to generate revenue but are necessary for the company’s operations. Both concepts have different treatment on financial statements and the way they are financed.
