Depreciation & Capital Expenditure

Depreciation helps reduce a company's operating income.

A company's senior leaders engage in capital expenditure transactions to improve a company's competitive standing and business performance in the long term. Depreciating capital assets helps a firm report accurate financial data at the end of each quarter or year.

Depreciation

Depreciation is an accounting method that helps a company allocate the cost of a fixed asset over several years. A fixed asset, also known as capital asset, is a resource that a firm intends to use in operating activities for more than 12 months. Examples include property, plants and equipment.

Capital Expenditure

Capital expenditure is a long-term investment process in which a firm purchases fixed assets for manufacturing or operating activities. The firm generally uses capital assets for several years. Capital expenditure levels are important because they provide insight into senior management's confidence in future economic trends.

Relationship

Depreciation and capital expenditure are distinct concepts, but they usually interrelate. Generally accepted accounting principles require a company to depreciate only capital assets. Accountants report capital expenditures in the balance sheet and depreciation expenses in the statement of profit and loss.

References

• Investopedia: Depreciation
• Investopedia: Capital Asset
• Investopedia: Capital Expenditure