A capital expenditure, or CAPEX, is considered an investment into the business. The money spent is not immediately reported on the income statement; rather, it is treated as an asset on the balance sheet. A CAPEX is deducted over the course of several years as a depreciation expense, beginning with the year following the purchase. The depreciation expense is reported on the income statement in the tax years it is deducted, resulting in reduced profit.
For example, say you own a flower shop and in 2012, you purchase a delivery van for $30,000. The van is recorded as an asset on 2012’s balance sheet, leaving the income statement for 2012 unaffected by the purchase. You expect to use the van for six years, so it is depreciated by $5,000 each year. So, on 2013’s income statement, a $5,000 expense is then reported. While a CAPEX does not directly affect income statements in the year of purchase, for each subsequent year for the expected useful life of the asset the depreciation expense affects the income statement.
A CAPEX may indirectly have an immediate effect on income statements depending on the type of asset that is acquired. Using the previous example, the van purchased for the flower shop is not recorded on the income statement for 2012, but gas and insurance expenses for the van are considered business expenses that affect the income statement. However, the expenses incurred by the van may be offset by the increase in revenue produced by the delivery van.