The process of depreciation is so common that accounting best practices are associated with it, and countries have legal requirements regarding how depreciation is performed and how it is calculated for tax purposes.Ĭapital expenditures are a fact of life for most companies, and they can be difficult to budget and plan for. This process is called depreciating an asset, or simply depreciation. Rather, a capital expenditure spreads the impact of the purchase over many months, or even years. Given the large size and variability of these purchases, and the long lives of the assets, representing them in a single transaction would have a misleadingly lopsided impact on the company’s financial statements. The purchases are usually irregular, often hard to plan for, and therefore hard to budget for.Ī capital expenditure is rarely entered into the company’s financial books as a single financial transaction.The asset purchased will be used over a long period of time, typically multiple years.The asset is relatively expensive, typically a one-time purchase (but the one-time purchase could be financed over time).The primary characteristics of a capital expenditure are: It could be the purchase of vehicles, buildings, or property. For other companies, it could be computer equipment and networking hardware. Capital expenditureĪ capital expenditure is the purchase of a physical asset that is expected to be used over a period of at least one year.įor a manufacturing company, the physical asset might be manufacturing equipment or moldings. There are three distinct types of money that most companies use for various expenditures. To understand this, a brief discussion about corporate finances is in order. Because along with changing how we leverage applications, the cloud has also changed the type of money it takes for us to operate those applications. A weird question, perhaps, but it’s an important question.