What is a capital cost?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
A capital cost is spending to acquire or improve an asset the business expects to use over more than one accounting period, such as equipment, a building or purchased software. Whether a particular cost is recorded as an asset depends on its nature and the business's accounting policies; your accountant can confirm the treatment.
Capital costs matter for planning because they can involve sizeable or irregular payments. A budget or cash flow forecast that lists only running costs may overlook equipment replacements or other planned investment. Listing these purchases on their own lines, with the month each payment is expected, shows how much cash or finance will be needed and when.
In the books, the purchase and the way it was paid for are two separate things. The item is entered from its invoice or bill of sale, and if a loan, hire purchase or chattel mortgage paid for it, the amount owed is recorded as a liability of its own, so the repayments that follow can be matched against it. Which accounts the purchase itself goes to is a question for your accountant.
In Australia
In business.gov.au's glossary, the examples of a capital cost are plant, equipment, buildings and land, bought in a single substantial purchase.
Its page on leasing or buying equipment explains that buying means paying for an item and owning it outright, with a loan as an option when there is not enough cash to pay upfront, while leasing means renting it from a leasing company that owns it. Its guide to choosing funding lists a loan, hire purchase, a chattel mortgage and trade credit from suppliers as funding options when buying vehicles, equipment or tools.
Worked example
| Item | Type | Amount (AUD) |
|---|---|---|
| Rent | Running cost | 24,000.00 |
| Electricity and phone | Running cost | 4,800.00 |
| Materials | Running cost | 38,500.00 |
| Total running costs | 67,300.00 | |
| Replacement delivery van (March) | Capital cost | 42,000.00 |
| Workshop compressor (August) | Capital cost | 6,500.00 |
| Total capital costs | 48,500.00 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Leaving the replacement of vehicles and equipment out of the budget because it does not happen every year.
- Entering a financed purchase without also recording the loan, hire purchase or chattel mortgage that paid for it.
- Deciding whether a purchase is a capital cost only from its size or how often it occurs, without checking its nature and the accounting treatment with your accountant.
Related terms
Related service
Management and cash-flow reports
Monthly reports that show where the business stands.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Leasing or buying vehicles and equipment
business.gov.au, Australian Government. Current at 16 October 2026, released 23 October 2024. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Choose your funding
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Setting up your finances checklist
business.gov.au, Australian Government. Current at 16 October 2026, released 13 September 2024. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.