What is the effect of capital expenditures on the balance sheet?

Capital expenditures (often referred to as CapEx) represent funds used by a company to acquire or upgrade physical assets such as property, plant, equipment, or infrastructure. When a company incurs capital expenditures, these costs are not expensed immediately; instead, they are capitalized.

The effect of capital expenditures on the balance sheet is that they increase long-term assets. This means that the costs associated with these expenditures are added to the company's asset base rather than being reflected as an expense on the income statement in the period they are incurred. Over time, these long-term assets will be depreciated, impacting the financial statements in future periods, but at the initial recognition, they increase the total asset balance on the balance sheet as they are recorded as property, plant, and equipment or other appropriate asset categories.

This process is important for providing a more accurate reflection of a company's financial position, as it emphasizes the ongoing investment in tangible long-term assets necessary for operations and growth.