What is capital expenditure? (Capex)

September 2023 | Published by Xero

Capital expenditure (definition)

Capital expenditure is money you spend to acquire or upgrade an asset such as land, equipment, or a building. It’s also known as capex.

Capital expenditures are made on assets that you expect to be of long term benefit to your business. A computer is a great example, if you plan to use it in your business and not sell it within a year.

You record capital expenditure on your balance sheet under assets rather than your profit or loss statement. It’s often recorded as property, plant and equipment (PP&E). As capital expenditures are used, they are depreciated. Capital expenditure is the opposite of operating expenditure or expenses (Opex).

Capex vs. opex: what's the difference?

The primary difference between capex and opex is how and how long you'll use the asset you bought. Capital expenditures buy assets you'll use to make money over a long period. Operating expenditures are what you spend day-to-day to run your business. Operating expenditures include your payroll, utilities, insurance, marketing, and materials you use up in your production process.

Examples of capital expenditure

Here are some examples of capex:

  • Property, including your land and buildings
  • Fit-outs of buildings, such as furniture and infrastructure
  • Equipment, vehicles, and work tools, like computers
  • Research and development (R&D) expenses
  • Intellectual property, such as patents and copyrights
  • Buying a new business

Maintenance capex vs growth capex

Capex is made up of two types: maintenance capex and growth capex.

  • Maintenance capex is what you spend to replace assets in order to keep operating and maintaining your current level of revenue and profitability. Replacing an old warehouse forklift is an example. Maintenance capex is a necessary expense if you want to continue to maintain profitability.
  • Growth capex is money you spend to grow your revenue and profitability. For example, growth capex adds assets that increase productivity, capacity, or expand your business into new markets. Buying three new forklifts for your new larger warehouse is an example. Growth capex is a discretionary expense.

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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.