As opposed to an ordinary (or operating expense), which covers the day-to-day costs necessary to keep a business running, a capitalized expenditure is an expense that is made to 1) acquire an asset (whether tangible or intangible) that has a useful life longer than a year or 2) improve the useful life of an existing capital asset (like property, plants, buildings, technology and equipment). Such expenses are recorded, or capitalized, on a company’s balance sheet as an investment, whereas ordinary expenses are expensed on a company’s income statement and deducted fully in the year the expense is incurred. Capitalization requires that a company spread the cost of a capitalized expenditure over the useful life of the asset.
Capitalized expenditures are made by companies in order to maintain their existing property and equipment, increase the scope of their operations, or create some other economic benefit. Examples of capital expenditures made to increase or improve assets include the purchase of: new work equipment, machinery, land, plants, buildings, warehouses, furniture, fixtures, vehicles, hardware, software, and intangible assets such as patents and licenses.
The type of industry in which a company operates largely determines the nature of its capital expenditures. Naturally, the most capital-intensive industries (like oil exploration and production, telecommunication, manufacturing, and utility industries) have the highest levels of capital expenditures. These expenditures have a substantial effect on both the short-term and long-term financial standing of companies.
[Last updated in June of 2021 by the Wex Definitions Team]