The amounts shown as assets are known as capital expenditure, capital expenditure normally yields benefit over a long period. Capital expenditure results in fixed assets.
The various types of capital expenditure are explained as under:
Expenditure which results in the acquisition of a permanent asset:
All assets mean anything which can be converted into cash later. All money spent for acquiring an asset is capital expenditure.
Expenditure in connection with the purchase, receipt or erection of a fixed asset:
All expenses, in addition to the purchase price, incurred for making the asset ready for use are added to the cost of the asset and thus this expenditure are called capital expenditure. Expenditure of this type are wages paid to workers for erecting machines, the cost of the platform on which the machine will be fixed, overhaul of second-hand machines purchased, interest on the loan raised to purchase a fixed asset, etc.
Expenditure for the extension of or improvement in fixed assets:
If because of any expenditure the profit earning capacity is increased, through lowering cost or increasing output the expenditure will be capital expenditure.
Expenditure incurred to acquire the right to carry on business:
The expenses necessary for either establishing the business, like preliminary expenses for floating a company, or obtaining license will be capital expenditure. Similarly the cost of a patent that is the right to produce certain goods in a certain manner will be capital expenditure.
Expenditure incurred to acquire a tangible asset:
Even if the asset does not prove to be profitable, the expenditure incurred on it is treated as capital expenditure.