Purpose of Capital Expenditure

Purpose of Capital Expenditure

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The best definition of capital expenditure is the expense or the amount of money that is invested by a company or government to acquire improve or maintain its fixed assets like buildings, roads, vehicles, railways, land, equipment, etc. They can be tangible, as well as intangible since they can be monetised and sold if required. These are typically massive one-time purchases of fixed assets that help in revenue generation over a period. Even when an amount is spent towards extending the life of an existing asset like repairing a roof, it can be considered a capital expenditure.

The difference between capital expenditure and revenue expenditure is that while the former is undertaken to acquire fixed assets for revenue generation over time, the latter is an ongoing operating expense that is used for running the day-to-day operations for carrying out the business smoothly. Revenue expenditure is short-term and does not involve buying assets that will generate revenue in the long term. Revenue expenditure appears in the income statement while capital expenditure is visible as assets in the balance sheets and provides long-term benefits for a business or government. Revenue expenditure is recurring while capital expenditure is non-recurring.

It is also important to understand the capital expenditure purpose and this slightly varies with governments and organisations. For a government, a higher capital expenditure helps in growing the demand within an economy and attracts private investments that sustain economic growth. Through the creation of long-term assets like roads, railways, etc., an economy can generate revenue for many years. For a business, capital expenditure helps in maintaining existing equipment and property and investing in the latest technology or other assets that can help with renewed growth.

However,capital expenditure planning is highly desired whether for the government or an enterprise. It helps in defining the particular way and the reason for which capital expenditure is required and the benefits that accrue from it. The expenditure may involve a substantial sum of investment that is designed to provide a return over time and hence, careful due diligence is required for the same. Planning also helps in assessing the long-term needs and evaluating the requirements threadbare. It also provides an avenue to understand a requirement so that any concerning area can be looked into and threats can be minimised before starting an operation.