What is Capital Expenditures(CapEx) and How to Calculate Capital Expenditures(CapEx)

Capital expenditure is one of the main keys so that an agency or institution can obtain fixed assets by buying. In addition, capital expenditure is an important thing that must be done by local governments. The benefits will be felt for up to one more fiscal year after the expenditure is made.

Capital expenditures can also be carried out by local governments by adding assets or assets belonging to local governments in order to increase expenditures that have a routine nature.

The term capital expenditure still sounds foreign to most of the general public. This term is very different from the basic concepts of accounting which are generally not only able to be reached by every general factor.

But also for those who are busy with accounting in a government agency, for that understanding, the basic accounting equations is also very important because it is related to capital expenditures.

Why? because with the existence of capital expenditures in each district or city, it can be obtained in the APBD realization report. For local governments, capital expenditures can be made in order to form capital.

The goal is of course that these expenditures can increase the benefits of fixed assets or inventory so that they can be maximized for more than one accounting period.

Understanding Capital Expenditure is

Based on Government Accounting Standards, the definition of capital expenditure is an expenditure or financing needed to be able to form capital by procuring, buying, or building an asset that has a value of more than one year in the accounting period.

Then, by paying attention to the information contained in the ledger, the company can more easily manage every activity of expenditure and income transactions. In this case, the expenditure includes additional expenditure activities that are routine in nature and also maintenance costs that are more maintain or increase the useful life.

A simple example of this capital expenditure is the purchase of land, factory machinery, building buildings, irrigation, roads, and also the purchase of other fixed assets.

Capital Expenditure Criteria

In the regulation of the Directorate General of Treasury related to guidelines for the use of revenue accounts for goods expenditures, capital expenditures, and personnel expenditures in No. PER-33/PB/2008 explains that the criteria for goods or capital expenditures are when the following conditions are met.

• Expenditures can result in income from fixed assets or other assets that can increase the lifespan, capacity and benefits of the assets themselves
• The expenditure activities carried out are able to exceed the capacity of fixed assets or other assets that have been stipulated in local government regulations.
• Procurement of fixed assets is carried out not for resale.
• Expenditures made after acquiring fixed assets or other assets with a lifetime of capacity, quality, benefits and volume of assets must continue to increase.
• Expenditures must be able to meet the minimum limit on the capitalization value of fixed assets or other assets.

Types of Capital Expenditure

Based on the understanding of capital expenditure above, there are several types of capital expenditure that are included in expenditure whose purpose is to obtain fixed assets. Some types of capital expenditures are as follows:

1. Land Capital Expenditure

Land capital expenditures are expenditures made by carrying out certain costs to procure, acquire, purchase, settle, in utilize land.

Expenditures can also be made for the purposes of changing names, vacating, renting land, equipment, deductions, making certificates, maturation of land, and various other expenses related to land rights.

The criteria for this land capital expenditure must be in a ready-to-use condition so that the benefits can be obtained immediately.

2. Equipment and Machinery Capital Expenditure

This type of capital expenditure is expenditure on various types of costs used for the purpose of procurement, replacement, addition, and also improving the quality of tools or machines that can be used for business operations.

The criteria for this expenditure are various kinds of company inventory that are able to provide benefits for more than one year of the accounting period. This various equipment and machines must also be ensured in a ready-to-use condition after discharge.

3. Building and Building Capital Expenditure

Capital expenditures on buildings and buildings are expenditures for costs that can be used for the procurement, replacement, addition, on buildings or buildings. This capital expenditure also includes expenditure activities for supervision, planning, management, and also increasing the capacity of buildings or buildings.

4. Road, Irrigation, and Network Capital Expenditure

This type of capital expenditure is expenditure incurred for additional activities, procurement, replacement, and improvement of the quality of construction and maintenance of roads, irrigation, and networks.

This expenditure also includes a budget for maintenance, planning, monitoring and also managing roads, irrigation, and also the network so that they are really ready for use.

5. Other Physical Capital Expenditure

Apart from capital expenditures on tools, machinery, land, buildings, irrigation, and roads, it turns out that there are some more capital expenditures that can become fixed assets. Examples of other physical capital expenditures include rental and purchase activity contracts, shopping for art goods, antiquities, books, and scientific journals.

When making financial statements, this spent budget will appear in the cash flow statement, but will not be on the income statement. Therefore, the cash will be reduced.

In contrast to the account, the net fixed assets will increase and depreciation costs will appear again when you depreciate the asset over its useful life.

Its features

The simple characteristics of capital expenditure are that it has a form, its nature is increasing, it has a useful period of more than one year in the accounting period, and its value is relatively material.

In addition, it also contains assets from the results of capital expenditures that are intangible in capital expenditures, but still have the same characteristics as the results from other capital expenditures.

How to Calculate

The rubus that can be used to calculate capital expenditures is as follows:

Capital expenditure = Net increase in fixed assets + Depreciation expense

or

Net increase in fixed assets = Fixed assets at the end of the year – Fixed assets at the beginning of the year

In this case, you must underline that capital expenditure is one of the components that can be used to calculate GDP. Thus, a decrease in capital expenditure will also contribute to an economic slowdown.

In addition, in the early stages of economic recovery, orders for fixed assets will increase. Even though the level of capacity utilization is low, businesses can see an opportunity to increase revenue. So, they can consider increasing expenses, especially for repairs and replacements.

Then, the existing capacity can no longer meet consumer demand, so the company will increase its fixed assets. During this period, business orders will focus more on new capital, such as complex and heavy machine tools, factories and warehouses.

So, capital expenditure is an expenditure made to be able to add fixed assets or existing investors, so that they will be able to provide their own benefits within a certain period of time. In this case, it will be entered into the accounting books, which means that capital expenditures will still have an impact on the company’s financial position.