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Simple English definitions for legal terms
capitalized expenditure
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A quick definition of capitalized expenditure:
A capitalized expenditure is an expense that a company makes to buy or improve an asset that will last for more than a year. This is different from regular expenses that are needed to keep the business running. Capitalized expenses are recorded on a company's balance sheet as an investment and are spread out over the useful life of the asset. Examples of capitalized expenses include buying new equipment, land, buildings, and software. These expenses have a big impact on a company's finances, especially in industries that require a lot of expensive equipment.
A more thorough explanation:
A capitalized expenditure is an expense that a company incurs to acquire or improve an asset that has a useful life longer than a year. Unlike ordinary expenses, which are expensed on a company's income statement, capitalized expenditures are recorded on a company's balance sheet as an investment. The cost of a capitalized expenditure is spread over the useful life of the asset.
Examples of capitalized expenditures include:
- Purchase of new work equipment, machinery, and vehicles
- Acquisition of land, buildings, and warehouses
- Investment in hardware, software, patents, and licenses
Capitalized expenditures are made by companies to maintain their existing property and equipment, increase the scope of their operations, or create some other economic benefit. The type of industry in which a company operates largely determines the nature of its capital expenditures. For example, a manufacturing company may invest in new machinery to increase production capacity, while a software company may invest in research and development to create new products.
Capitalized expenditures have a significant impact on a company's financial standing, both in the short-term and long-term. By spreading the cost of an expenditure over the useful life of an asset, a company can improve its financial ratios and profitability.