Capital Expenditure

                            Capital Expenditure

Capital expenditure is that expenditure which result in the purchase, alteration or improvement of fixed assets. Such expenditures result in an increase in the earning capacity of a business. Such expenditure is incurred with a view to bringing in improvements in productivity or earning capacity for getting long-term advantages for the business. It is not incurred for day -to-day working of the business. The following types of expenditure are treated as – 'Capital Expenditure’.
i) Acquisition of an asset.
ii) Delivery of fixed assets.
iii) Installation of fixed assets
iv) Legal cost of buying assets/property.
v) Demolition costs
vi) Architect fees
vii) Improvement of fixed assets
viii) Extension of an asset:
ix) Putting the new assets into working condition
x) Acquisition of a right to carry on business
xi. Cost of overhauling second hand machines.
xii. Development expenditure
Other examples are --- money paid for goodwill since it will attract the old firm's customer and thus result in higher sales and profit. Money spent to reduce the working expenses, for example conversion of hand driven machinery to power driven machinery and expenditure which enable a firm to produce a large quantity of goods.
It is important to note that all amounts spent up to the point an assets is ready for use should be treated as capital expenditure. The examples are - Fees paid to lawyer for drawing up the purchase deed of land, overhaul expenses of second hand machinery etc. Interest paid on loans raised to acquire a fixed asset is particularly noteworthy. Such interest can be capitalized; i.e. added to the cost of the assets but only for the period before the assets is ready for use.
It is not necessary that capital expenditure always generate profit. Even if there is a loss or asset has not been used, such expenditure will be treated as capital expenditure.

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