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Capital Expenditure: Definition, Examples, and How to Calculate

Companies typically needed expenditure to benefit their operations or a fixed asset’s mass benefits. We usually call the expenditures with the aim of increasing the efficiency and capacity of the company in the next few years are capital expenditure. Huge companies are usually more familiar with this word as a result of their income and growing needs. Capital expenditure is different from other spending terms because of CapEx or Capital Expenditure because it benefits long-term periods.

Fixed assets that fall into the category of CapEx consist of physical assets and intangible assets. We usually make expenses once in a few years and cash. To find out more about the meaning of capital expenditure, the examples, the formula, and more, check out the article below!

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Table of Content

  • Understanding Capital Expenditure

    Capital expenditure (CapEx) is a fund that companies use to upgrade their fixed assets. Not only upgrade, but also includes buying, repairing, maintaining, and improving fixed company assets. The company assets referred to here include buildings, software, equipment, business, and others. The purpose of issuing CapEx funds is as a company investment or need in a new project. CapEx is different from operating costs or OPEX because CapEx uses surplus revenues to invest. CapEx uses a one-time cash outflow principle with long-term advantages, because CapEx budgets are enormous, we need meticulous planning to meet fixed asset investment needs.

    Also read: How to Reduce Operating Costs in Your Retail Business

    Capital Expenditure Example

    Capital Expenditure Example

    Capital expenditures do not include all company expenses. Expenditures for capital expenditure should include maintaining, buying, increasing fixed assets. Fixed assets are defined as physical assets that cannot be consumed and have a useful life of one year or more. So that the costs incurred are beyond operational costs.

        • In today’s digital age, the main asset used is software. The purchase or improvement of software is CapEx on non-realized assets that have a useful life of more than one year. The software used is usually ERP software that can help the business operations of a company. Companies that already have operational activities with high complexity usually need ERP software. Thus software is one of the invisible assets that might indirectly boost a company’s productivity.
        • The use of the software is closely related to the use of hardware such as computers, servers, LAN networks, internet networks, and others. Hence it supports the employment of software as an assistant to the company’s commercial activities. This equipment upgrade can be in the form of new purchases, maintenance, upgrades, or other means.
        • In addition, buildings and properties are important assets for the company because we can use them for many years. Renewal of buildings and property can be in the form of purchases, maintenance, or upgrades related to buildings and property. The useful period owned by buildings and property is long enough that the design of funds issued on buildings and properties must be mature enough.
        • The company also needs vehicles for distribution. The cost used on vehicles is quite large, especially for companies that have high mobility, especially in remote rural areas. Companies can choose various ways in vehicle renewal, namely can acquire a fleet, buy new, or just rent.

    Capital Expenditure vs. Revenue Expenditure

    Expenses are essential in business. We can use these for both long- and short-term benefits. Usually, the aims of these expenses are to boost company efficiency and therefore also profits. Generally, there are two types of expenditure, there are capital expenditure and revenue expenditure. Although both expenditures, the purpose of these two expenditures is different.

    As explained earlier, capital expenditure aims to benefit in the long term. The costs incurred are usually extremely high due to the long-term depreciation of the asset. Capital expenditure is usually classified as fixed assets on a balance sheet. Such as building assets or property, furniture, vehicles, equipment, and so on.

    Revenue expenditure is an expenditure made on daily business activities so that the benefits are felt only when the activity is carried out. These costs can not represent as fixed assets instead current period expenses. The costs incurred are also not as large as capital expenditure. Revenue expenditure cannot increase the value of a fixed asset so that it only benefits in the short term. Examples that fall into the classification of revenue expenditure are administrative expenses, employee wages, inventory, rental costs, electricity, insurance, taxes, postage, and others.

    Also read: What is Revenue? Definition, Type, and How to Calculate It

    How to Calculate Capital Expenditure?

    If you can access the company’s cash flow statement, then you can directly see the capital expenditure in the investing cash flow section. However, if not then you can calculate it manually using the formula. Here’s how to calculate CapEx:

        • First of all calculate the first Net increase at PPE (property, plant, and equipment), namely by reducing PPE at the end of the year with PPE at the beginning of the year. Calculation of PPE value is done in the asset section on the balance sheet
        • Next, calculate the depreciation on the section balance sheet. Calculation of depreciation expenses by reducing accumulated depreciation at the end of the year by accumulated depreciation at the beginning of the year. In addition to this method, you can also directly see depreciation expenses in the income statement.
        • The last step is to include these values in the capital expenditure formula.

    CapEx Formula

    The formula of capital expenditure is as follows:

    Capital expenditure formula

    Note:

    CapEx: Capital Expenditure.

    PPE: Property, plant, and equipment

    Depreciation: Curren depreciation

    The formula comes from the logic that the current period PPE on the balance sheet is the same as the previous period’s PPE plus capital expenditure minus depreciation. This formula is also derived from income statement derivatives and balance sheets,

    Conclusion

    Capital expenditure is one of the expenditures made to increase the efficiency as well as the profit of a company. This expenditure is in the form of buying, renting, maintaining, and increasing fixed assets in the form of physical and intangible. CapEx principle is a one-time cash outlay, not repeated because only once in a few years, but the benefits obtained are long-term periods.

    One of the non-realized assets that fall into the CapEx classification is software. Software is used by companies to simplify the work so that it does not need to expend a lot of material and energy. HashMicro ERP software is an important software owned by companies, especially in large companies, so that operational activities become more efficient and effective. 

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Sarah Nabilah
An intern content writer at HashMicro.

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