Do you know the meaning of the term capital expenditure or CAPEX? Alternatively called capital expenses or capital spending, CAPEX refers to the amount of money used to upgrade or buy/acquire physical assets for business use. Assets that can be bought include computers, vehicles, buildings, warehouses and any other machinery that can bring about long-term productivity within a business. CAPEX must be accounted for separately so that it can be scrutinized and approved independently.
Accounting for CAPEX
A capital expense is seen as an investment and is normally recorded as an asset on a balance sheet. This cost should be subtracted as a depreciating expenditure over the useful life of an asset (except land). When it comes to capital expenditure budgeting, the process entails a financial evaluation to establish if the organization’s ROI goal is met. If the ROI targets are met, a qualitative assessment is carried out by the senior management team. A lot of items are included in this budgeting process: acquisition or lease of fixed assets, joint ventures, acquisition of other businesses, new products and markets, R&D(research and development) and IT expenses and so on.
During the accounting process, CAPEX are not totally deducted in the period when they got incurred. Secondly, tangible assets are depreciated while intangible ones are amortized over time. Cash used to buy inventory is considered Capex as well as money spent on intellectual property (patents and copyrights). If you buy a house that will provide income in future, you will group it under capital spending. It’s not all assets that can be depreciated. Those that cost beyond a company’s preset capitalization limit (cap limit) are the ones that get depreciated the following year. Those that cost less than the cap limit get treated as an expense in the year it is obtained.
CAPEX Vs OPEX
OPEX refers to Operational Expenses. These are expenditures that generate benefits within the current period. Hence OPEX are deducted from the revenues within the periods they are made. Operational expenses are never depreciated and are always recorded as an expense for when they are incurred. This is not the case with CAPEX. Instead, capital expenses are known as investments that would benefit the company in future. CAPEX are recorded on a balanced sheet as assets and never subtracted from the revenues made when they are incurred. Expensing of CAPEX across their useful period is either computed via depreciation or amortization. In each case, a part of the capitalized expenditure’s value is computed to be exploited in the every period. Then it is recorded as amortization or deprecation expenditure. This goes on until the depreciated or amortized asset’s usefulness is concluded and its value finished.
How to calculate CAPEX correctly
The solution is special software from Anaplan.com. It will make your work quick and accurate even if you aren’t so good at accounting. Software will also help you allocate capital effectively and let your staff create and submit comprehensive capital expenses requests for approval in a quick manner. An approval limit for every person can be set with ease and capital requests can be made very fast via a step by step process. Once finished, CAPEX request can be submitted for approval. The best thing with Anaplan software is that it will follow all approval policies designed by your company to get in touch with all the users that have to review the request. You will enjoy flexible reporting from the time an approver authorizes an expense. Whether these will be reports on budget tracking, audits, statistics on ROI, forecasts or past allocation of funds, capital expenditure software is the ultimate solution.