I do not understand what capital expenses are compared to just typical business expenses. Also what it means it capitalize an expense? I thought maybe amortize it, but I really am not sure? Thank you!
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A capital expense is an upfront cost to your business. For example, buying the equipment or building in which your business will operate is a capital expense, since it’s a one-time, upfront cost.
To capitalize an expense is to make it look like a capital expense. You might say that your car will cost $500 per year to maintain, for a total of 10 years. You can capitalize it by finding out how much money you would need on Day 1 of buying the car to keep it maintained for its entire lifetime, and budgeting for that. This way, you are guaranteed to be able to maintain the car throughout its lifetime (assuming your math and assumptions are correct).
Capital Expenses are expenses to maintain assets -so, if you own a parking lot you have to resurface it periodically. The lot is your capital (because you spent capital to buy it) and the resurfacing is an expense to maintain that capital. It is usually deductible.
When you capitalize an expense you are delaying placing the full value on the books (usually done because the item is depreciating over time.)
A ‘capital’ expense is normally a one time fee for the aquisition of some asset. If you go buy 40 Boeing 787s, that is a capital purchase. You buy them once and are done with that. The maintenance costs associated with those planes are ‘operational expenses’, or expenses that are incurred by using products. If you ‘capitalize’ something, that is to say you have wrapped some operating expenses in with the capital purchase. So back to our planes, say for a little bit extra Boeing will throw in oil changes (yes, I know planes don’t have ‘oil changes’ in the traditional automotive sense) to sweeten the deal. That oil change is normally an operational expense, you pay it when it is time, after so much use. In this case, you pre-paid it on purchase, so you have successfully ‘capitalized’ the expense.
We did the inverse in IT a few years ago, instead of ‘capitalizing’ everything we were told to ‘operationalize’ everything. This helped move everything to the ‘cloud’, the story was it made the expenses more predictable. It didn’t, in fact it covered up how much of a rip-off some cloud products were, but for a time this was the major selling point. Our capital expenses would drop like a rock! They did, then again, we never had to pay $30 mil in monthly operational expenses for the right to access our own data either….
A capital expense is money or debt spent on something that has lasting, tangible value. If you can sell it after you bought it, it’s likely a capital expense. Durable goods are capital expenses, most services or fees are not. If you spend $200 on a sign… $100 for the sign, $50 for delivery, and $50 for installation, the $100 for the sign is a capital expense, but the delivery and installation of the sign are operational expenses.
Capitalizing an expense is using semantics to make an operational expense look like a capital expense. i.e. purchasing a Sign Package for $200 that includes delivery and installation. Technically, you could sell that package for $200 up until the day the sign is installed. This is done for accounting purposes, when you’d rather have money appear as an asset after it’s already been spent.
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