Capital Expenses: Meaning, Types, and Formula

What is Capital Expenses?

The amount of money that is spent on buying, installing, or bringing the capital asset into a function is called Capital Expenses.

Let's take an example of the company: Calculate the capital expenditure of a company in 2022 based on the given information:

• The depreciation expense in the income statement is Rs 10,500
• PP&E value on the balance sheet at the end of 2022 is Rs 45,000
• PP&E value on the balance sheet at the beginning of 2022 is Rs 40,000

Calculation:

CapEx = ( PP&E value at the end - PP&E value at the ebgining) + depreciation expense

Hence, the capital expenditure during 2022 is Rs 16,000.

Types of Capital Expenses

There are different types of capital expenditure:

• Equipment Upgrades: The upgrades in the equipment are necessary, and they are subject to depreciation in case the costs increase the capitalization limit.
• Building and Property: The capital expenses, like property acquisitions or building upgrades, are used for a long-term purpose, and they can also be financed through mortgages and debts.
• Computer Equipment: The computer equipment, intangible assets, such as patents, and vehicles, are also considered capital expenses.
• Software Upgrades: The expenses related to software, such as upgrades, are considered capital spending, and based on the specific criteria, they can be depreciated.
• Vehicles: There are some companies that need vehicles for the distribution of services, such as delivery. These vehicles are considered capital expenses. However, the cost of leasing vehicles is considered an operational expense.
• Intangible Assets: The capital expenses are not just limited to the physical or tangible assets. They can also involve intangible assets.

Capital Expenses Formula

The formula for the capital expenditures from the balance sheet and income statement is:

CapEx = PP&E (current period) - PP&E (prior period) + Depriciation (current period)

This formula is derived from the formula of the current period on the balance sheet, which is equal to the prior period plus the capital expenditure minus the depreciation.