What Is CapEx (Capital Expenditure)?

CapEx (capital expenditure) is money spent to buy, upgrade or extend the life of long-term assets - equipment, vehicles, machinery, buildings, fit-outs. Instead of hitting the profit and loss account in the month it is paid, a capital purchase is capitalised: recorded as an asset on the balance sheet and written off gradually through depreciation over its useful life. Its counterpart is OpEx, the day-to-day operating spend - rent, salaries, subscriptions, repairs - that is expensed immediately.

What you will learn

• What counts as CapEx - the two tests every capital purchase must pass
• CapEx examples - typical capital purchases for a small business
• How to calculate CapEx - the formula and where the numbers come from
• Maintenance vs growth CapEx - the split that shapes cash planning
• CapEx vs OpEx - why the distinction reaches past bookkeeping
• CapEx and the asset register - keeping the ledger and the real world in step

What counts as CapEx

Two tests, both of which must pass:

• Longevity - the purchase will be used for more than one accounting year.
• Materiality - it costs more than the organisation’s capitalisation threshold, the policy line below which even long-lived items are simply expensed.

Upgrades count when they extend an asset’s life or capability: a new engine for a van, a structural extension, a major machine refit. Repairs that merely restore normal working order do not - fixing the van’s existing engine is OpEx, replacing it with a better one is usually CapEx. The boundary cases keep accountants in work, but the principle is whether you have created or improved a long-term asset or just kept one running.

CapEx is not confined to things you can touch. A perpetual software licence, a patent, a trademark or capitalised development work are all capital expenditure too - they create long-term intangible assets that sit on the balance sheet and are written down over time. The only real difference is the label on the write-down: tangible assets depreciate, intangibles amortise.

CapEx examples for a small business

• Laptops, desktops and monitors for a growing team
• A delivery van or company vehicle
• Workshop machinery, power tools above the threshold, test equipment
• Office fit-out: desks, partitioning, networking installation
• Perpetual software licences bought outright (subscriptions, by contrast, are OpEx)

Smaller long-lived items - cables, peripherals, external drives - typically fall under the threshold and are expensed, even though they may outlast some capitalised kit. That is the threshold doing its job: keeping the fixed-asset ledger focused on purchases worth tracking financially.

How to calculate CapEx

There are two ways to arrive at a CapEx figure, depending on what you can see.

From the balance sheet and income statement. When you only have published accounts, CapEx for a period is:

CapEx = closing PP&E - opening PP&E + depreciation for the period

PP&E is property, plant and equipment - the fixed-asset total on the balance sheet. You add depreciation back because it lowers the recorded value of assets without any cash leaving the business; adding it in recovers the amount actually spent on new assets over the period.

From the cash flow statement. CapEx is reported directly under investing activities, usually as “purchases of property and equipment”. Net CapEx nets off any cash received from selling old assets in the same period.

From your own records. Internally you rarely need to reverse-engineer anything. The cleanest figure is the sum of the capitalised purchases in your fixed-asset register for the year - each with its price, date and expected useful life already recorded. If the register is accurate, the CapEx total falls straight out of it.

Maintenance vs growth CapEx

Not all capital spend serves the same purpose, and analysts often split it in two:

• Maintenance CapEx keeps existing capacity intact - replacing a worn machine, refreshing an ageing laptop fleet, re-roofing a warehouse. It is largely non-discretionary: defer it long enough and output, safety or reliability suffers.
• Growth CapEx expands the business - a second van, an additional production line, a new location. It is discretionary, tied to a deliberate decision to grow, and can be paused when cash is tight.

The distinction rarely appears as a line in the accounts, but it matters for planning. Maintenance CapEx is the floor you cannot avoid year to year, so separating it out gives a truer picture of free cash flow and of what a business would still have to spend even if it stopped growing.

CapEx vs OpEx

The distinction shapes more than bookkeeping:

• Cash vs expense timing. CapEx drains cash now but spreads the expense over years; OpEx hits both at once. A profitable-looking year can hide heavy capital spending, and vice versa.
• Where it lands in the accounts. CapEx goes on the balance sheet as an asset and reaches the profit and loss account only gradually, through depreciation; OpEx is an immediate expense on the income statement.
• Budget ownership. CapEx usually needs a business case and sign-off above normal spending authority; OpEx flows through departmental budgets.
• Tax treatment. Capital purchases are typically relieved through depreciation or capital allowances over time rather than deducted immediately - the rules vary by jurisdiction.
• The subscription shift. Buying servers is CapEx; renting cloud capacity is OpEx. Many businesses now deliberately trade capital outlay for operating spend, which changes the budget shape without changing what the business actually uses.

Comparing routes properly means looking past the label at the total cost of ownership - purchase or subscription, support, consumables and disposal together.

CapEx and the asset register

Every capitalised purchase creates two records that must stay in step: a line on the finance ledger that depreciates on schedule, and a physical or digital asset out in the business that gets used, moved, repaired and eventually disposed of. When the two drift apart, the ledger fills with ghost assets - equipment still depreciating on paper that was lost or scrapped long ago - and asset valuation quietly stops meaning anything. The fix is operational, not accounting: give each capital purchase an asset record at the point of arrival, with its purchase price, date, supplier and expected useful life, and keep that record updated until disposal. AMPthilly’s asset register stores exactly those financial fields per asset, with CSV export so finance can reconcile the register against the ledger at year-end.

Related terms

• OpEx - the operating spend expensed immediately rather than capitalised
• Capitalisation Threshold - the policy line between CapEx and an immediate expense
• Depreciation - how capitalised tangible assets are written down over their useful life
• Amortisation - how capitalised intangibles like licences are written down
• Asset Valuation - keeping defensible values on the assets CapEx creates
• Total Cost of Ownership - the full lifetime cost behind a buy-vs-subscribe decision