Capital expenditure is the

Expenditure in a business is classified as either capital expenditure or revenue expenditure, and the distinction matters because it determines how an item is treated in the final accounts.

Capital expenditure is money spent to acquire, improve, or extend the earning capacity of fixed assets, items such as land, buildings, machinery, and equipment that will be used in the business over more than one accounting period. Because the benefit lasts for several years, this cost is recorded on the statement of financial position (balance sheet) as an asset and is only gradually charged to profit through depreciation.

Money spent on buying goods for resale is revenue expenditure, since the goods are consumed within the trading cycle and their cost appears in the trading account as cost of sales. The day-to-day cost of running a business, such as rent, wages, and stationery, is also revenue expenditure, charged in full to the profit and loss account of the period in which it is incurred. Extra capital paid in by the proprietor is neither type of expenditure; it is an increase in the owner's investment in the business, recorded in the capital account.

Because it is money used to obtain assets that will generate benefits over several years, capital expenditure is correctly described as money spent on acquiring fixed assets.

Examination tip: ask whether the spending buys something the business will keep and use for years (capital expenditure) or something that is used up within the current trading period (revenue expenditure).