What is capital expenditure? Definition and FAQs

Published Monday 16 September 2025

Table of contents

• What is capital expenditure?
• How to calculate capital expenditure
• Accounting and tax treatment of capital expenditure
• Managing capital expenditures with Xero
• FAQs on capital expenditure

Key takeaways

• Classify capital expenditures correctly by recording them as assets on your balance sheet rather than immediate expenses, then spread their cost over the asset's useful life through depreciation.
• Distinguish between maintenance capex (replacing existing assets to maintain operations) and growth capex (acquiring new assets to expand capacity) to better track your investment strategy and business growth.
• Apply the capital expenditure formula by adding the change in property, plant and equipment to current period depreciation to accurately calculate your total capex spending.
• Consult an accountant for asset purchases over $10,000 or when uncertain about capex classification to ensure proper tax treatment and take advantage of deductions like Section 179 expensing or bonus depreciation.

What is capital expenditure?

Capital expenditure (capex) is money you spend to acquire or upgrade long-term business assets like land, equipment, or buildings.

Capital expenditures help your business generate revenue over multiple years. A computer you use for three years is a capital expenditure, but office supplies you use quickly are not.

Here's how capex works in your accounting:

• Balance sheet: Record capital expenditure as assets, not expenses
• Common category: Listed as property, plant and equipment (PP&E)
• Depreciation: Spread the cost over the asset's useful life
• Operating expenditure: Covers day-to-day costs, unlike capital expenditure

Capex vs. opex: what's the difference?

The difference between capital expenditure (capex) and operating expenditure (opex) depends on how long the purchase benefits your business. Learn more about the difference between capex and opex.

Capital expenditures (capex):

• Purpose: Buy assets that generate revenue for multiple years
• Examples: Equipment, buildings, vehicles, software licenses
• Accounting: Recorded as assets on your balance sheet

Operating expenditures (opex):

• Purpose: Cover day-to-day business operations
• Examples: Payroll, utilities, insurance, marketing, office supplies
• Accounting: Recorded as expenses that reduce current year profits

Examples of capital expenditure

Here are some common examples of capital expenditure:

Physical assets:

• Property: Land, buildings, warehouses
• Equipment: Manufacturing machinery, computers, vehicles
• Infrastructure: Office furniture, security systems, HVAC upgrades

Intangible assets:

• Intellectual property: Patents, copyrights, trademarks
• Software: Business management systems, specialized tools
• Business acquisitions: Purchasing another company or its assets

Growth investments:

• Research and development: Product development costs. Public companies must disclose R&D policies for the last three years.
• Expansion projects: New locations, production lines

Maintenance capex vs growth capex

These expenses fall into two categories based on their business purpose.

Maintenance capex:

• Purpose: Replace or repair existing assets to maintain current operations
• Business impact: Keeps revenue and profitability at current levels
• Example: Replacing a broken warehouse forklift
• Classification: Maintains current operations

Growth capex:

• Purpose: Acquire new assets to expand business capacity or reach
• Business impact: Increases revenue potential and market opportunities
• Example: Buying additional forklifts for a new, larger warehouse
• Classification: Discretionary investment in future growth

How to calculate capital expenditure

Capital expenditure calculation helps you track business investments and plan future purchases.

Basic capital expenditure (capex) formula: Capex = Change in property, plant and equipment (PP&E) + current period depreciation

Follow these steps to calculate capital expenditure:

1. Find PP&E change: Subtract last year's PP&E from this year's PP&E
2. Add depreciation: Include depreciation expense from your income statement
3. Calculate total: Your result shows actual cash spent on new assets

You can use a simple method to track capital expenditure:

• Record purchases: Track all asset purchases over $1,000 (or your threshold)
• Categorize spending: Separate maintenance from growth investments
• Monitor trends: Compare quarterly or annual capex to budget and revenue

Here's an example of how to calculate capital expenditure:

• Property, plant and equipment (PP&E) increased by $50,000 this year
• Depreciation expense totaled $15,000
• Total capex = $50,000 + $15,000 = $65,000

Accounting and tax treatment of capital expenditure

You treat capital expenditures as assets, not immediate expenses. This affects your taxes and financial statements differently from regular business costs.

Accounting treatment:

• Balance sheet: Record capex as assets that appear on your balance sheet
• Depreciation: Spread the cost over the asset's useful life (typically 3-10 years)
• Cash flow: Shows as investing activity, not operating expense

Tax implications:

• No immediate deduction: You cannot deduct the full cost in the first year
• Depreciation deductions: Claim annual depreciation as a tax deduction
• Section 179: You may qualify for immediate expensing up to annual limits. For tax year 2024, the maximum section 179 expense deduction is $1,220,000. This amount is reduced if the total cost of property placed in service exceeds $3,050,000.
• Bonus depreciation: Some assets qualify for accelerated depreciation. For 2024, you may claim a special depreciation allowance of 60% for certain qualified property.

When to consult an accountant:

• Asset purchases over $10,000
• Uncertainty about capex vs opex classification
• Complex depreciation schedules
• Tax planning for large investments

Managing capital expenditures with Xero

Tracking your assets and their depreciation does not have to be complicated. The right tools help you manage capital expenditures and see your business's financial health clearly.

Xero fixed asset management helps you record new assets, automate depreciation, and keep your books accurate. This makes it easier to focus on growing your business.

Start your free trial of Xero.

FAQs on capital expenditure

Here are some answers to some common questions you may have about capital expenditures.

Is a capital expenditure an asset or an expense?

You record a capital expenditure as an asset on your balance sheet. Over time, you expense it through depreciation. This is different from an operating expense, which you expense in the period it occurs.

What's the minimum cost for an item to be a capital expenditure?

There is no single dollar amount that applies to every business. Each company sets its own capitalization policy, which defines the cost threshold for an item to be treated as capital expenditure. Set this policy with guidance from an accountant.

Can software be a capital expenditure?

Yes, software can be a capital expenditure. If you buy software with a one-time payment and it has a useful life of more than a year, you usually treat it as capital expenditure. If you pay for software through a monthly or annual subscription, you usually treat it as an operating expense.