A capital outlay is a financial payment for a large or long-term business asset. Recording expenses as capital outlays helps businesses track how their operations affect their revenues and profits. Paying for non-capital outlays, such as office supplies or advertising, or bartering for goods or services, affect a company’s short-term income and profit margins, while buying a capital asset, such as land or a building, have long-term impacts on a business.
Capital Outlay Examples
Common capital assets, also known as fixed assets, include machinery used to make products, an office building or warehouse, restaurant kitchen stoves and refrigerators, cars and trucks, computer systems and office furniture. The word "outlay" is a common business term for a payment. A capital outlay also can include the expense to improve, upgrade or repair a capital asset, such as changing the lighting in a building to a system that is more energy efficient.
Capital Expense Classification
Companies use different financial formulas and expense classifications to help them determine what will happen if their sales go up or down. Because capital assets often last for more than a few years, they aren’t always recorded as annual expenses. Spreading the cost of capital outlays over a number of years gives a truer expense of what it costs to make and sell a product and run a company. For example, a $10,000 copy machine might make 1 million copies before it breaks. If a company makes 200,000 copies per year, the expense to own the machine is $2,000 per year for five years. In some instances, a business will record all of the expense of a capital asset in the year it’s purchased to reduce income tax liability.
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