Depreciation & Capex

Depreciation lowers a company's fiscal expense.

A company's top leadership implements depreciation methods for fixed assets, or long-term assets, to allocate asset costs over many periods. Capex, also known as capital expenditure, helps a firm improve operating activities.

Depreciation Defined

Depreciating a fixed asset means spreading its cost over several years. A fixed asset is an economic resource that a company owns and intends to use in manufacturing processes and operating activities for more than 12 months. Examples include property, plants, equipment and machinery.

Capex Defined

A firm incurs capital expenditures to upgrade or improve the operating efficiency of capital resources, such as buildings, machines or equipment. Capital resources are also referred to as fixed or long-term assets. Capex investments are important because they provide insight into top leadership's confidence about future economic trends.

Relationship

Depreciation is distinct from capex, but these concepts often interrelate. For instance, a manufacturing firm may upgrade machinery at an old plant, bringing the machine's value from $1 million to $1.5 million. At the end of the year, an accountant must depreciate the upgraded machine.

References

• Fixed Asset Software: Depreciation Methods
• Investopedia: Capital Expenditure