Capital expenditure (CapEx)
Money spent on assets that will serve the business for more than a year, such as equipment, vehicles or buildings, recorded on the balance sheet rather than expensed at once.
In short
- CapEx is capitalized: it goes on the balance sheet and is expensed gradually through depreciation.
- Most businesses set a capitalization threshold, and anything cheaper is expensed immediately.
- For Canadian tax, capital assets are written off through capital cost allowance (CCA), not accounting depreciation.
Capital expenditure, or CapEx, is spending on something the business will use for several years. Buying a delivery van, a commercial oven, a server or an office fit-out are all capital expenditures. Because the benefit is spread over years, the cost is spread too.
How it is recorded
A capital purchase is recorded as an asset on the balance sheet. Each period, part of its cost moves to the income statement as depreciation (for physical assets) or amortization (for intangible ones). A $30,000 machine expected to last five years might add $6,000 of depreciation to expenses each year instead of $30,000 in the month it was bought.
CapEx or OpEx?
The line between capital and operating expenses is set by policy and judgment. Most businesses set a threshold, such as $2,500, below which items are expensed even if they last more than a year. Repairs that restore an asset are usually expensed; improvements that extend its life or capacity are capitalized. Getting this wrong in either direction distorts profit: expensing a big purchase makes one month look terrible, and capitalizing routine costs makes profit look better than it is.
Tax follows its own rules. In Canada, the deduction for capital assets comes through capital cost allowance, with rates set by asset class, which usually differs from book depreciation.
Worked example
A new espresso machine
A café buys a $12,000 espresso machine expected to last six years. Its capitalization threshold is $1,500. The machine is recorded as equipment. Using straight-line depreciation, $2,000 a year, or about $167 a month, goes to expenses. The $350 grinder bought the same week falls under the threshold and is expensed immediately.