Capital outlay is the money spent to purchase or improve an asset such as a building, a business vehicle or to finance a project such as new construction. Companies or investors might also spend capital to invest in securities such as stocks.
An outlay is when a company has spent money to acquire some type of tangible asset, like the purchase of new equipment, which would be a capital expenditure. A capital expenditure is a type of capital outlay. It consists of payments a company makes over time, typically extending out for longer than one year. For example, a company might buy a new commercial truck to transport its goods to retail locations.
An outlay is when the company has spent money to acquire some type of tangible asset. For example, a company makes fixed asset outlays when it chooses to purchase new equipment. In some cases, companies call this a capital expenditure, and it's also known as a purchase of property and equipment. You might see it listed using this terminology on the company's balance sheet.
What Is Capital Expenditure
A capital expenditure is a type of capital outlay. It consists of payments a company makes over time, typically extending out for longer than one year. For example, a company might buy a new commercial truck to transport its goods to retail locations.
The company would recognize the capital expenditure for the truck on its balance sheet in a few ways. It would increase or debit its truck asset account. If the company paid cash, it would credit or reduce its cash asset account. If the truck is expected to have a five-year useful life, at the end of each year, the company takes one-fifth of the truck's value and expenses it as depreciation on the income statement, and increases its accumulated depreciation account. By doing this, the company matches the expense with the capital outlay over the life of its asset.
Examples of Capital Expenditures
Another example of capital expenditure is a capital project, which often refers to projects that need a significant amount of capital outlay. For example, a commercial real estate company building a skyscraper uses capital project planning to carry out and complete the project.
It starts with a plan to allocate or raise the capital needed for the project, and companies might use the services of an investment banker to help raise external capital to fund the project. The building project may take place over several months, with capital outlays happening in different phases. This type of capital project and the associated capital expenditures become part of a much larger plan involving architects, construction project managers and many others.
Budgeting for Capital Outlay
As part of a regular budgeting cycle, companies typically engage in the capital budgeting process. In the same way that you would spend money each year to maintain the exterior of your home or your car, companies must budget money each year to spend on maintaining equipment, buildings and other assets that keep the company operating. Companies must also budget for anticipated growth, which might require capital outlays for new equipment and an additional warehouse property.