Capital Expenditures:
Definition and Explanation:
An
expenditure which results in the acquisition of
permanent asset which is intended lo be permanently
used in the business for the purpose of earning
revenue, is known as capital expenditure. These
expenditures are 'non-recurring' by nature. Assets
acquired by incurring these expenditures are
utilized by the business for a long time and thereby
they earn revenue. For example, money spent on the
purchase of building, machinery, furniture etc. Take
the case of machinery-machinery is permanently used
for, producing goods and profit is earned by selling
those goods. This is not an expenditure for one
accounting period, machinery has long life and its
benefit will be enjoyed over a long period of time.
By long period of time we mean a period exceeding
one accounting period.
Moreover, any
expenditure which is incurred for the purpose of
increasing profit earning capacity or reducing cost
of production is a capital expenditure. Sometimes
the expenditure even not resulting in the increase
of profit earning capacity but acquires an asset
comparatively permanent in nature will also be a
capital expenditure.
It should be
remembered that when an asset is purchased, all
amounts spent up to the point till the asset is
ready for use should be treated as capital
expenditure. Examples are: (a): A machinery was
purchased for $50,000 from Karachi. We paid carriage
$1,000, octroi duty $500 to bring the machinery from
Karachi to Lahore. Then we paid wages $1,000 for its
installation in the factory. For all these
expenditures, we should debit machinery account
instead of debiting carriage A/c, octroi A/c and
wages A/c. (b): Fees paid to a lawyer for drawing up
the purchase deed of land, (c): Overhaul expenses of
second-hand machinery etc. (d): Interest paid on
loans raised to acquire a fixed asset etc.
Examples:
- Purchase of
furniture, motor vehicles, electric motors,
office equipment, loose tools and other tangible
assets.
- Cost of
acquiring intangible assets like goodwill,
patents, copy rights, trade marks, patterns and
designs etc.
- Addition or
extension of assets.
- Money spent on
installation and erection of plant and machinery
and other fixed assets.
- Wages paid for
the construction of building.
- Structural
improvements or alterations in fixed assets
resulting in an increase in their useful life or
profit earning capacity.
- Cost of issue
of shares and debentures (certain expenditures
are incurred by the companies when share and
debentures are issued).
- Legal expenses
on raising loans for the purchase of fixed
assets.
- Interest on
loan and capital during the construction period.
- Expenditures
incurred for the development of mines and
plantations etc.
- Money spent to
bring a second-hand asset into working
condition.
- Cost of
replacing factory building from an old place to
a new arid better site.
- Premium given
for a lease.
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