The Capital Expenditure Process
Capital expenditures are expenditures that will help a business produce revenues in more than one time period. In contrast with revenue expenditures that are recorded as single-period expenses, capital expenditures are recorded as assets so that their values can be amortized over time in much the same manner as normal assets. Capitalized expenditures possess residual values, useful lifespans and are disposed of at the end of their usefulness in the same manner as normal assets.
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Matching Principle
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Matching principle in accrual basis accounting requires that costs be recognized in the same time period as the revenues that their occurrence helped produce. Capital expenditures exist because their occurrences help produce revenues across multiple time periods, meaning that their values should be spread out and recorded as expensew in each of the periods in which their occurrence helped produce revenue.
Capitalization
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Capitalization is the act of recording an expenditure as an asset rather than an expense. Capital expenditures have their entire values recorded as assets upon capitalization. For example, $100,000 in research and development costs for a patent is recorded as $100,000 in patent when capitalized.
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Amortization
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Capitalized expenditures have their values written off as amortization expense over the multiple time periods of their usefulness. Accountants amortizing capitalized expenditures can choose to either write amortization expenses in each period as a direct detriment to the asset or accumulate it as a contra-asset that represents how much the asset has lost in value.
End of Usefulness
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Capitalized expenditures have their values reduced to zero at the end of their usefulness in the same manner as other assets that are either depreciated or amortized. If the accountant chose to record amortization expense as a direct detriment to the asset, that asset should have the last of its value written off as the amortization expense of its last period, and no further accounting is required. If the accountant chose to record the expenses as a contra-asset, then both the asset and the contra-asset are written off completely at the end of the asset's usefulness, thus preventing a one-time single-period loss from the asset's disposal that would distort the business's income statement.
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References
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