Capital expenditure

What it means

Expenditure on acquiring, or adding to the value of, non-current assets.

Example

Buying a delivery van, or an extension to premises, is capital expenditure.

Why it matters

It is not charged in full to the income statement; instead the asset is capitalised and depreciated.

In practice

Capital expenditure is spending on buying, improving or extending non-current assets. It is not charged in full to the income statement. Instead the cost is recorded as an asset in the statement of financial position and spread across the asset's useful life through depreciation. It also includes the costs of getting an asset ready for use, such as delivery, installation and legal fees on buildings.

For example, buying machinery for RM50,000 plus RM2,000 installation gives capital expenditure of RM52,000. This is capitalised and then depreciated. It is not shown as a RM52,000 expense in one year.

Students often confuse it with revenue expenditure, the running costs used up within the period. Getting this wrong distorts the accounts. Treating capital expenditure as revenue understates profit and assets. Treating revenue expenditure as capital overstates both. A useful test is whether the spending brings a lasting benefit over several years or is consumed almost at once.

If you cannot decide whether an item is capital or revenue in an exam, one of our teachers can practise the decision with you using real examples. Book a trial class.

Related terms

• Revenue expenditure
• Non-current asset
• Depreciation
• Error of principle
• Materiality concept

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.1 Capital and revenue expenditure and receipts (page 14).

Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.