Capital expenditures (CapEx) are accounted for on a company’s financial statements in a few different ways:
- Balance Sheet: The initial cost of the long-term asset acquired through CapEx is recorded on the balance sheet as a capital asset, also known as property, plant, and equipment (PP&E). The cost of the asset is depreciated over its useful life, and the accumulated depreciation is subtracted from the asset’s cost to determine the net book value.
- Income Statement: The depreciation expense related to the capital asset is recorded on the income statement as a non-cash expense. Depreciation is the allocation of the cost of the asset over its useful life and is typically recorded as an operating expense.
- Cash Flow Statement: The initial cash outflow associated with the CapEx is recorded in the cash flow statement as a cash flow from investing activities. This section of the cash flow statement also includes any proceeds from the sale of long-term assets.
It is important to note that CapEx is a non-recurring expense that can have a significant impact on a company’s financial statements. Companies need to carefully evaluate the potential benefits and risks of CapEx investments and consider their impact on the company’s financial position, profitability, and cash flow. Additionally, the method of depreciation used can affect a company’s net income and tax liability, so companies should consider the tax implications of their depreciation policies when making CapEx decisions.