What does 'capital expenditure' refer to?

Capital expenditure refers to funds that are utilized to acquire, upgrade, or improve long-term physical assets such as property, buildings, equipment, and technology. These expenses are essential for the growth and maintenance of a company's operational capabilities, as they contribute to the production process and the generation of revenue over time. Unlike operating expenses, which are tied to the day-to-day functioning of the business, capital expenditures are generally larger investments that benefit the company over multiple accounting periods.

By investing in physical assets, a business can enhance its efficiency, increase production capacity, and ultimately drive profitability. This distinction is crucial in financial accounting, as capital expenditures are recorded on the balance sheet rather than the income statement, where operating expenses are reflected. Recognizing capital expenditures properly helps in understanding the long-term financial health and investment strategies of a business.