Lakeshore Print Co. spends money all year long. It pays $90 to have the delivery van's oil changed, and it pays $47,000 for a new digital press that will print orders for the next eight years. Both payments leave the bank account, but they are not the same kind of spending. The oil change is used up almost immediately. The press will help earn revenue for years to come. If the business treated the press as an expense this year, this year would look terrible and the next seven years would look unrealistically good, because they would enjoy the press for free. Accounting fixes this by sorting every expenditure into one of two groups before it is recorded.
Capital versus revenue expenditures
- A capital expenditure buys or improves a long-lived asset. It benefits more than one fiscal period: it buys a new asset, extends an existing asset's useful life, increases its capacity or output, or improves its efficiency. It is debited to an asset account (capitalized).
- A revenue expenditure benefits only the current period. Ordinary repairs and routine maintenance (oil changes, tune-ups, replacing a light bulb, repainting) keep an asset working as expected but do not make it last longer or do more. It is debited to an expense account.
- Why GAAP cares: the matching principle (also called expense recognition) says an expense belongs in the same period as the revenue it helps earn. A press that earns revenue for eight years should be expensed gradually over those eight years, not all at once.
- Materiality: a $25 stapler will last for years, but recording and amortizing it would cost more effort than the information is worth. Small items like this are expensed immediately because the effect on the statements is immaterial.
- Buying a delivery van or a printing press
- Replacing the van's engine so it lasts three more years
- Adding a second floor to the warehouse
- Installing a new roof that extends the building's life
- Paving a parking lot
- Oil changes and tire rotations
- Replacing worn ink rollers on the normal schedule
- Repainting an office
- Repairing a broken window
- Annual insurance on the van once it is in use
What goes into the cost of a capital asset
Capital assets (also called property, plant and equipment) are recorded at cost, following the cost principle. Cost means every expenditure that is necessary to acquire the asset and get it ready for its intended use. That includes far more than the price on the invoice: if the press must be shipped, insured on the truck, bolted down, wired in and test-printed before it can do its job, all of those costs are part of its cost. Costs that are not needed to get the asset ready (repairing damage caused by careless unloading, a traffic fine on the delivery truck, insurance once the asset is already running) are expensed instead.
| Asset | Included in cost | Not included (expense instead) |
|---|---|---|
| Land | Purchase price; legal fees; land transfer tax; real estate commission; clearing, grading and draining; demolishing an old building on the site (less any salvage sold); unpaid back property taxes the buyer agrees to pay | Property taxes for periods after the purchase |
| Land improvements | Paving, fencing, outdoor lighting, parking lots, landscaping, sprinkler systems | Snow removal, routine lawn care |
| Buildings | Purchase price and legal fees, plus repairs and renovations needed to make a used building ready; or, if constructed: materials, labour, architect's fees, building permits | Repairs after the building is in use; insurance once in use |
| Equipment | Purchase price (net of discounts); freight-in; insurance while in transit; assembly and installation; testing before use | Damage caused during installation; annual insurance and licence renewals once in use; routine maintenance |
Basket purchases: one price, several assets
Sometimes a business buys several assets together for one lump-sum price, such as a building with the land under it and the equipment inside. This is a basket (lump-sum) purchase. The assets cannot share one account, because land is never amortized, the building lasts decades and the equipment lasts a few years. So the single price is split among the assets in proportion to their fair values (usually from an independent appraisal) at the purchase date.
| Asset | Appraised fair value | Share of total | Allocated cost |
|---|---|---|---|
| Land | $300,000 | 30% | $270,000 |
| Building | $600,000 | 60% | $540,000 |
| Equipment | $100,000 | 10% | $90,000 |
| Total | $1,000,000 | 100% | $900,000 |
| Date | Account | Debit | Credit |
|---|---|---|---|
| Mar. 1, 2026 | Land | $270,000 | |
| Building | $540,000 | ||
| Equipment | $90,000 | ||
| Cash | $180,000 | ||
| Mortgage Payable | $720,000 | ||
| To record the basket purchase of land, building and equipment |
The cost of natural resources and intangible assets
- Natural resources (timber stands, mineral deposits, gravel quarries, oil and gas reserves) are recorded at the cost of acquiring the property or the rights to extract, plus the legal fees and site-preparation costs needed to get the resource ready to extract. Their cost is later allocated by depletion as the resource is removed.
- Intangible assets (patents, copyrights, trademarks, franchises, licences) have no physical form but give legal or contractual rights. A purchased intangible is recorded at its purchase price plus costs such as legal and registration fees.
- Goodwill is recorded only when a whole business is purchased, at the amount by which the price exceeds the fair value of the business's net identifiable assets. A business never records goodwill it builds up itself.