What Is Capital Expenditure? A Simple Guide for Small Businesses

Capital expenditure (CapEx) is money a business spends to buy or improve a long-term asset, such as equipment, a vehicle or a building, that it will use for more than one year. Instead of counting the whole cost as an expense when you pay it, you record the asset on the balance sheet and spread its cost over the years you use it, through depreciation. Spending on day-to-day running, such as rent, utilities and routine repairs, is an operating expense and counts in full in the period it's incurred.

How Capital Expenditure Is Recorded

OpenStax's Principles of Accounting describes this as capitalization: "Capitalization is the process by which a long-term asset is recorded on the balance sheet and its allocated costs are expensed on the income statement over the asset's economic life" (section 11.2, opened October 29, 2026).

• What goes into the cost. OpenStax says "the total cost of acquiring the asset is included in the cost of the asset. This includes additional costs beyond the purchase price, such as shipping costs, taxes, assembly, and legal fees."
• How the cost is spread. "Depreciation is the process of allocating the cost of a tangible asset over its useful life."
• The straight-line method. OpenStax (section 11.3) describes it as a method that "evenly splits the depreciable amount across the useful life of the asset": (cost − salvage value) ÷ useful life. Salvage value is what the asset is expected to be worth once its useful life ends.

Capital Expenditure in the Financial Statements

• Balance sheet: the asset at its cost, less accumulated depreciation. OpenStax defines book value as "the asset's original cost less accumulated depreciation."
• Income statement: depreciation expense each year, not the full purchase price in the year you buy.
• Statement of cash flows: the cash paid for the asset. OpenStax (section 16.2) lists "payments for the purchase of land, buildings, equipment" among investing cash flows, and notes that "Free cash flow is calculated as cash flow from operating activities, reduced by capital expenditures". See what is a cash flow statement.

Worked Example: Buying a Machine

A sample with invented figures: a print shop buys a machine for $11,500.00, pays $300.00 for shipping and $200.00 for installation, and expects to use it for 5 years and then sell it for $2,000.00.

1. Cost to capitalize

$11,500.00 + $300.00 + $200.00 = $12,000.00

2. Journal entry when the machine is bought

• Debit Equipment: $12,000.00
• Credit Cash: $12,000.00

3. Yearly straight-line depreciation

($12,000.00 − $2,000.00) ÷ 5 = $2,000.00 a year

4. Journal entry at the end of each year

• Debit Depreciation Expense: $2,000.00
• Credit Accumulated Depreciation: $2,000.00

5. Book value

• After year 1: $12,000.00 − $2,000.00 = $10,000.00
• After year 5: $12,000.00 − $10,000.00 = $2,000.00, the expected salvage value

Result: in the year of purchase, the statement of cash flows shows $12,000.00 paid for equipment as an investing outflow, while the income statement shows $2,000.00 of depreciation expense.

U.S. Tax Treatment

Tax rules can differ from the accounting above. These are U.S. federal rules from the IRS. Ask your accountant how they apply to your business.

• Section 179. IRS Publication 946 (2025) (page last reviewed April 30, 2026) explains "what property does and does not qualify for the section 179 deduction, what limits apply to the deduction". The amount you can deduct is subject to "a dollar limit and a business income limit". Pub 946 says:
  • "For tax years beginning in 2025, the maximum section 179 expense deduction is $2,500,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,000,000."
  • "For tax years beginning in 2026, the maximum section 179 expense deduction is $2,560,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,090,000."
• De minimis safe harbor. The IRS's tangible property final regulations page (page last reviewed August 4, 2026) says that without an applicable financial statement, "you may use the safe harbor to deduct amounts up to $2,500 ($500 prior to Jan. 1, 2016) per invoice or item (as substantiated by invoice)". With one, the limit is "up to $5,000 per invoice or item".
• Repairs or improvements. The same IRS page sets out a "regulatory framework for analyzing whether expenditures are for deductible repairs or capital improvements". Whether a cost is a repair you deduct now or an improvement you capitalize is a judgment call for your accountant.

Recording Purchases in Billed

Billed's expense and receipt tracking page says: "An expense in Billed records who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry." It adds that "The expense report shows what you spent over a date range," and that reports can be "exported for your accountant, bookkeeper or tax software."

Related Guides

• How to calculate depreciation
• Depreciation calculator
• What is a balance sheet
• What is a cash flow statement
• What is amortization
• What is accrual accounting
• Invoice software

FAQ

What is the difference between capital expenditure and operating expenditure?

Capital expenditure buys or improves a long-term asset, one you'll use for more than a year. It's recorded on the balance sheet and expensed over time through depreciation. Operating expenditure covers day-to-day costs such as rent, utilities and routine repairs, which are expensed in the period they're incurred.

What costs are included in a capital expenditure?

Everything it takes to acquire the asset: the purchase price plus extra costs such as shipping, taxes, assembly and legal fees. In the worked example, a $11,500.00 machine with $300.00 shipping and $200.00 installation is capitalized at $12,000.00.

How does capital expenditure affect the financial statements?

The asset appears on the balance sheet at cost less accumulated depreciation. The income statement shows depreciation expense each year. The statement of cash flows shows the purchase as an investing outflow in the year you pay.

Can a small business deduct the full cost of equipment in the first year?

In the U.S., IRS Publication 946 explains the section 179 deduction for qualifying property, subject to "a dollar limit and a business income limit." Publication 946 says: "For tax years beginning in 2026, the maximum section 179 expense deduction is $2,560,000." Ask your accountant whether and how it applies to you.

Is buying a computer a capital expenditure?

If it will be used for more than one year, it's a long-term asset that can be capitalized. In the U.S., the IRS de minimis safe harbor lets a business without an applicable financial statement deduct amounts up to $2,500 per invoice or item. Ask your accountant which treatment suits your business.