Capital expenditure (capex)
Learn what capital expenditure (capex) is, how it differs from opex, and how to calculate and record it.
September 2023 | Published by Xero
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- Capital expenditure (capex) is money spent to buy or improve long-term assets, such as premises, vehicles, and equipment, that benefit your business for more than one year.
- Capex is recorded on the balance sheet as an asset and written down over time through depreciation, unlike operating expenses that are recorded in full in the period they occur.
- You can estimate capex from your balance sheet by taking closing net fixed assets, subtracting opening net fixed assets, and adding depreciation for the period.
- Planning capital expenditure protects your cash flow and helps you balance replacing worn-out assets against investing for growth.
What is capital expenditure?
Capital expenditure, often called capex, is money a business spends to buy, build, or improve long-term assets that will benefit the business for more than one year. These assets include land, premises, equipment, vehicles, and technology.
Unlike day-to-day expenses, capex is not recorded as an immediate cost on your income statement. Instead, it appears on the balance sheet as an asset, typically under property, plant and equipment. The cost is then spread over the asset's useful life through depreciation, which gradually reduces its recorded value each year.
Understanding capex is an important part of small business accounting because it affects how you plan for large purchases and how those purchases appear in your financial records.
Capex vs opex: what's the difference?
Capital expenditure and operating expenditure serve different purposes in your business. Capex funds long-term assets that generate value over multiple years, while opex covers the everyday costs of running your business.
- Capital expenditure buys assets you own and use for years, such as property, vehicles, or machinery
- Operating expenditure pays for recurring costs used up within the year, such as rent, salaries, utilities, and stock
- Capex is capitalised on the balance sheet and depreciated over time
- Opex is recorded as an expense on the income statement in the period it occurs
- Capex decisions affect your long-term capacity; opex decisions affect your short-term profitability
Capital vs revenue expenditure
Capital expenditure and revenue expenditure are distinguished by how long the benefit lasts. Capital expenditure acquires or improves long-term assets that serve the business beyond the current financial year. Revenue expenditure covers short-term running costs, routine repairs, and consumables that are used up within the year.
For example, buying a new delivery vehicle is capital expenditure because the vehicle will be used for several years. Paying for fuel or routine servicing for that vehicle is revenue expenditure because those costs relate to the current period only.
Types of capital expenditure
Capital expenditure typically falls into several categories relevant to small businesses.
- Property and premises: purchasing land, buildings, or making permanent improvements to leased space
- Equipment, vehicles and tools: buying machinery, bakkies, delivery vehicles, or specialised tools
- Technology and software: acquiring computers, servers, or business software with long-term licences
- Maintenance capex: replacing worn-out assets to keep your current operations running
- Growth capex: adding new assets to expand your capacity or enter new markets
Maintenance capex preserves your existing capabilities, while growth capex increases them. Both are capital expenditure, but they serve different strategic purposes in your business.
Examples of capital expenditure
For South African small businesses, capital expenditure can take many forms depending on your industry and growth stage.
- Buying commercial premises or land for your business
- Purchasing a delivery vehicle or bakkie
- Acquiring machinery or manufacturing equipment
- Buying computers, office furniture, or fitting out a new workspace
- Purchasing business software with perpetual licences
- Buying another business or its assets
How to calculate capital expenditure
You can calculate capital expenditure using figures from your balance sheet. The formula is: capital expenditure equals closing net fixed assets minus opening net fixed assets plus depreciation for the period.
- Find your net fixed assets at the start of the period. For example, R500,000.
- Find your net fixed assets at the end of the period. For example, R600,000.
- Determine the depreciation expense for the period. For example, R50,000.
- Calculate capex: R600,000 minus R500,000 plus R50,000 equals R150,000.
This means the business spent R150,000 on capital expenditure during the period. Tracking accumulated depreciation helps you understand how much value your assets have lost over time.
Where capital expenditure appears in your accounts
Capital expenditure shows up in two main places in your financial statements. On the cash flow statement, capex appears under investing activities as a cash outflow when you pay for the asset.
On the balance sheet, the asset is recorded (capitalised) under property, plant and equipment at its purchase cost. Over time, depreciation reduces the asset's carrying value, reflecting its wear and use. This spreads the cost of the asset across the years it benefits your business.
Why capital expenditure matters for your business
Planning your capital expenditure helps you make better decisions about when and how to invest in your business. Large purchases can strain your cash flow if you do not budget for them properly.
- Budgeting for capex prevents unexpected cash shortfalls when you need to replace or upgrade assets
- Understanding capex helps you balance maintenance spending against growth investments
- Tracking capex supports smarter decisions about financing, whether through savings, loans, or leasing
Effective cash flow planning accounts for both the timing and size of capital expenditure, so you can invest in growth without jeopardising your day-to-day operations.
Manage your capital expenditure with Xero
Xero helps you track your assets, monitor depreciation, and generate reports that show exactly where your money goes. With clear visibility into your finances, you can plan capital purchases with confidence. Ready to take control of your business accounting? get one month free and see how Xero makes managing your finances easier.
FAQs on capital expenditure
Here are answers to common questions about capital expenditure for small businesses.
What does capex stand for?
Capex is short for capital expenditure. It refers to money spent on acquiring or improving long-term business assets.
What's the difference between capex and opex?
Capex is spent on long-term assets like property or equipment, while opex covers day-to-day running costs like rent, salaries, and utilities. Capex is capitalised on the balance sheet; opex is expensed immediately.
Is capital expenditure tax deductible in South Africa?
You generally cannot deduct capital expenditure in full in the year of purchase. Instead, its cost is claimed over time through capital allowances or wear-and-tear allowances under SARS rules.
Where does capital expenditure appear in the financial statements?
Capital expenditure appears under investing activities on the cash flow statement and as property, plant and equipment on the balance sheet. The asset's value is then reduced each year through depreciation.
What's the difference between capital and revenue expenditure?
Capital expenditure buys long-term assets that benefit the business for more than one year. Revenue expenditure covers short-term costs and repairs used up within the current financial year.
Related terms
Learn more about capital expenditure
Handy resources
Advisor directory
You can search for experts in our advisor directory
Xero Small Business Guides
Discover resources to help you do better business
Financial reporting
Keep track of your performance with accounting reports
Disclaimer
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.