Financial Planner Question: Download Financial Planner PDF
Tell me why do capital expenditures increase an organization's assets (PP&E), while other expenditures, like paying taxes, employee salaries, utility bills, etc. do not increase an organization's asset base, but instead show up as expenses on the income statement that reduce equity via retained earnings?
Answer:
Unlike general expenses that provide benefit over a short period time (i.e., employee's work, taxes, etc.), capital expenditures provide benefit over a longer period of time. Due to the duration of their estimated benefit--usually several years--capital expenditures are capitalized on the balance sheet, where shorter term expenditures are expensed on the income statement. This is the difference between an asset and an expense.