Depreciation

**Capital expenditure** or **capital expense** (**capex** or **CAPEX**) is the money a company spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles, equipment, or land. It is considered a capital expenditure when the asset is newly purchased or when money is used towards extending the useful life of an existing asset, such as repairing the roof.

Capital expenditures contrast with operating expenses (**opex**), which are ongoing expenses that are inherent to the operation of the asset. Opex includes items like electricity or cleaning. The difference between opex and capex may not be immediately obvious for some expenses; for instance, repaving the parking lot may be thought of inherent to the operation of a shopping mall. The dividing line for items like these is that the expense is considered capex if the financial benefit of the expenditure extends beyond the current fiscal year.

For tax purposes, capex is a cost that cannot be deducted in the year in which it is paid or incurred and must be capitalized. The general rule is that if the acquired property's useful life is longer than the taxable year, then the cost must be capitalized. The capital expenditure costs are then amortized or depreciated over the life of the asset in question.

## Depreciation

In accountancy, **depreciation** refers to two aspects of the same concept:

* The decrease in value of assets (fair value depreciation)
* The allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle)

Depreciation is a method of reallocating the cost of a tangible asset over its useful life span of it being in motion. Businesses depreciate long-term assets for both accounting and tax purposes.
The former affects the balance sheet of a business or entity, and the latter affects the net income that they report.

Generally the cost is allocated, as depreciation expense, among the periods in which the asset is expected to be used. Methods of computing depreciation, and the periods over which assets are depreciated, may vary between asset types within the same business and may vary for tax purposes. These may be specified by law or accounting standards, which may vary by country.

There are several standard methods of computing depreciation expense, including fixed percentage, straight line, and declining balance methods. Depreciation expense generally begins when the asset is placed in service. For example, a depreciation expense of 100 per year for five years may be recognized for an asset costing 500.

Depreciation has been defined as the diminution in the utility or value of an asset. Depreciation is a non cash expense. It does not result in any cash outflow. Causes of depreciation are natural wear and tear.

Depreciation expense does not require current outlay of cash. However, since depreciation is an expense to the P&L account, provided the enterprise is operating in a manner that covers its expenses (e.g. operating at a profit) depreciation is a source of cash in a statement of cash flows, which generally offsets the cash cost of acquiring new assets required to continue operations when existing assets reach the end of their useful lives.

## Amortization

**Amortisation** is paying off an amount owed over time by making planned, incremental payments of principal and interest. To amortise a loan means "to kill it off". In accounting, amortisation refers to charging or writing off an intangible asset's cost as an operational expense over its estimated useful life to reduce a company's taxable income.

## External links

* https://www.irs.gov/pub/irs-regs/depreciation\_faqs\_v2.pdf