Accounting Technician II Practice Test

Capital expenditure is spending that creates or enhances a long-term asset. It increases the amount recorded on the balance sheet and is not charged to the income statement in the period of purchase; instead, it is capitalized and depreciated over the asset’s useful life. This includes buying new equipment or making improvements to an asset that extend its life or increase its capacity. That’s why the statement that capital expenditure adds to long-term assets or improves assets is the best description. It captures the idea of recording the cost as part of the asset's value and then allocating it over time through depreciation. In contrast, revenue expenditure covers ordinary operating costs that keep the business running and are expensed immediately in the period incurred. Saying capital expenditure is expensed immediately would mix it up with revenue expenditure, and saying revenue expenditure reduces equity is misleading for describing the nature of capital spending.