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What is Capital Expenditure (CapEx)?

Capital expenditure (CapEx) is money a business spends to acquire, upgrade or extend the life of a long-term asset such as equipment, vehicles, buildings or software that will be used for more than one year. Instead of being expensed immediately, CapEx is recorded on the balance sheet as an asset and expensed gradually through depreciation.

The reason CapEx is treated differently from a normal expense is timing. A delivery van bought today will help the business earn for five years or more, so its cost is spread across those years through depreciation rather than hitting a single month's profit. That is the matching principle: the cost of an asset is matched to the periods that benefit from it.

For a small business, the practical question is whether a purchase should be expensed now or capitalised. The rough rule is whether the item will provide value beyond the current year and whether its cost is material enough to matter. A new laptop that lasts three years is usually capitalised; a box of printer paper is expensed. Getting this right matters because it changes both reported profit and the tax treatment of the purchase in most jurisdictions.

Example

A courier buys a van for €20,000 and expects to use it for five years. The van is capital expenditure: €20,000 is recorded as an asset, and roughly €4,000 is expensed as depreciation each year rather than the full amount in year one.

Questions

What is the difference between CapEx and OpEx?

CapEx is spending on long-lived assets that deliver value over multiple years and is expensed through depreciation. OpEx is the recurring day-to-day cost of running the business and is expensed immediately. Buying a machine is CapEx; the electricity to run it is OpEx.

Should I capitalise or expense a purchase?

Capitalise if the item will be used for more than one year and its cost is material. Expense it if it is consumed within the year or is too small to track as an asset. The threshold varies by business, but the test is always whether the asset delivers value beyond the current period.

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