CAPITAL EXPENDITURE :

Capital expenditure is that expenditure which results in acquisition of an asset or which results in an increase
in the earning capacity of a business. The benefit of such expenditure lasts for a long period of time.

Examples: Purchases of land, buildings, machinery, furniture, patents, etc. All these assets stay in business and are used again and again. Other examples are money paid for goodwill (like the right to use the established name of an outgoing firm) since it will attract the old firm’s customers and thus will result in higher sales and profits; money spent to reduce working expenses like conversion of hand-driven machinery to power-driven machinery and expenditure enabling a firm to produce a large quantity of goods. Expenditure which does not result in an increase in capacity or in reduction of day-to-day expenses is not capital expenditure, unless there is a tangible asset to show for it.

All sums spent up to the point an asset is ready for use should also be treated as capital expenditure. Examples are: fees paid to lawyer for drawing a purchase deed of land, overhauling expenses of second hand machinery, cartage paid for bringing machinery to the factory from supplier’s premises and money spent to install a machinery; and even interest on loans taken to acquire fixed assets only for the period before the asset becomes operational.