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Why do capital expenditures increase assets (PP&E), while other cash outflows, like paying salary, taxes, etc., do not create any asset, and instead instantly create an expense on the income statement that reduces equity via retained earnings?
Capital expenditures increase your assets value/price. For instance if you purchase an item for your machine to (upgrade and enhance) its production, that will be capital expenditure adds to your assets. While other expenses like salaries and wages do not add value to your assets.
From capital expenditure services or revenue can be generated for a long period of time and this expenditure is adjusted with the services and revenue received from this assets. As a result primarily it create asset and adjusted with revenue with its tenure of life.
On the other hand Salary and other expense which is made for instant services received matched with revenue as this out flow will not create any further value for a particular time.
The business cycle is as below
We bring capital to create the assets through which we produce goods by incurring expenditures and generate revenue. And when we make profit it added to capital which is used for business expansion or create more asset.
Property Plant & Equipment Should be Capitalized due to its nature, because these items giving benefits to a company for a more than1 accounting period. While, Salary paid to employees and taxes paid relating to only current period. Salary paid = to benefits taken already.
Capital expenditure is improves or mentain the asset Revenue producing ability (conditions ) ,so it must be capitalized
while the Expense is other cash outflow that resulted from the Company operations and not effect on capital assets .
Capital expenditures bring for you the value for a longer term that spread over years hence you call it an asset while operating expenses such as paying salary or call it paying salary to finance manager for his services for the month of June will get his services for June only,,, you can't get his services for July and August form the payment of June Salary.. this make it your cost... hence its game of benefits
From my viewpoint, Capital expenditures are capitalized because of the timing of their estimated benefits – the lemonade stand will benefit the firm for many years.
The employees’ work, on the other hand, benefits the period in which the wages are generated only and should be expensed then. This is what differentiates an asset from an expense.
Capital expenditures do not increase assets, example is when a company purchase an equipment through cash basis, a debit to equipment account and a credit to cash account which falls both as an asset account - no effect.
Capital expenditures increase an asset account if the company delay the payment which gives us a debit to equipment and a credit to accounts payable or any liability account. This case there will be an increase in asset since we also has an increase in our liability.
Cash outflow such as salary and taxes is an obligation of the company to pay each period, this are expenses during normal operating cycle which needs to be included in the profit and loss calculations. At the end of the period since all income statement accounts are nominal we will close all this account to retained earnings account. Profit will be added while Losses will decrease our retained earnings.
but we get benifit from those expenses in other shapes .
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