How Do Capital Expenditures Affect the Income Statement?
Businesses invest in capital initiatives to build the operational framework necessary for long-term productivity. By doing so, they ensure that department heads have proper resources to gain market share, tap into new sectors and increase sales. Accountants record sales and expenses -- including capital expenditures -- in the corporate income statement.
To win the economic competition, a company articulates an overall policy aimed at developing top-quality products and services, as well as winning the hearts and minds of external financiers. To implement top leadership’s strategic vision, business-unit chiefs coordinate the work of rank-and-file personnel, making sure they react quickly to market conditions. Capital expenditures help businesses adapt to the long-term market environment. These costs generally span a period exceeding one year -- and run the gamut from equipment purchases and production machinery acquisitions to real estate investments. Capital assets are also called tangible assets, fixed resources or long-term assets.
Analyzing a firm’s income statement indicates to investors whether top management’s profit commitment is obvious and absolute. This report shows corporate financiers how adeptly senior executives run the firm’s businesses, as well as whether their strategic vision is bearing fruit, financially speaking. Also known as a statement of profit and loss or statement of income, an income statement includes corporate revenues, expenses and net income.
As operating charges, capital expenditures negatively affect the income statement. In other words, these expenses decrease a company’s income. Capital-expenditure management, a key work stream in operations management, helps a business focus its resources in key areas: depreciation administration, obsolescence monitoring, financial accounting and corporate finance. Depreciation allows the firm to allocate its capital assets over several years, thus reducing the capital expenditure it records annually.
Companies train bookkeepers and junior accountants to record capital-asset transactions in accordance with financial reporting rules. To record a capital-resource purchase, a bookkeeper debits the “property, plant and equipment” account and credits the notes-payable account. If the purchase is a cash acquisition, the bookkeeper credits the cash account. The accounting concept of credit is distinct from the banking terminology; crediting cash -- an asset account -- means reducing corporate funds.
Besides the income statement, capital expenditures affect other financial statements. Accountants record long-term assets in the balance sheet, also known as a statement of financial position or statement of financial condition. When companies take out loans to fund capital acquisitions, financial managers make entries in the “cash flows from investing activities” and “cash flows from financing activities” sections of the statement of cash flows.