One of the quickest and most effective ways for organizations to preserve their cash is to have it in capital investments which are also coined as capital expenditure. All the physical and fixed long-term assets that lay the foundation of any business come under the category of capital expenditures. It facilitates the core business activities. Let’s get to know more about it.
EXPENDITURE AND TYPES OF EXPENDITURE
An expenditure is a payment that is either on cash or credit whenever a good or service is purchased. There are two types of expenditures. Capital expenditure that a company incurs when it purchases an asset with a useful life of more than one year and revenue expenditure occurs when a company spends money on a short-term benefit or on something that has a useful life of less than one year. They both are recorded in the same financial year in which they have incurred and cannot be carried forward to the next year.
TYPES AND IMPORTANCE OF A CAPITAL EXPENDITURE
There are many types of Capital expenditure, a few of them are as follows:
TANGIBLE ASSETS that are tangible, non-consumable, and immovable. Examples include:
Real estate – Investing in any property, a building, as well as maintaining, renovating, and paying off the debts on the property.
Tools and equipment – Purchase of tools and equipment, manufacturing facilities, depreciation expenses, and maintenance and improvement expenses.
Vehicle – Purchase of any vehicle including the maintenance, delivery, distribution, and depreciation charges.
INTANGIBLE ASSETS that are not physical or tangible. Examples include:
Licenses – Registration fees or licenses, trademarks, etc.
Copyright – Protecting products and services, ideas with patents and copyrights that ultimately provide a company with the legal rights to prevent unauthorized, sharing, selling, and making.
Software – Acquisition, and upgradation of any software.
Capital expenditures are significant as they not only help to set up an organization for a long period but also help it to define its objectives, prepare the budgets accordingly, and move forward. The assets purchased can be mortgaged by the company which makes it easier for them to acquire the loan from banks and other facilities. It also helps to attract investors and help to improve the financial health of the balance sheet and boost greater investment from the investments. Capital expenditures help in the formation of assets that generate income for many years. Capital expenditures also come with certain limitations that include the uncertainty of not being able to make profits or positive outcomes. Irreversibility as it is difficult to reverse the capital expenditure choices as well as the measurement limitations that include difficulty in finding, quantifying, and predicting the expenses that are associated with the capital expenditures.
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