Imagine a bakery in Nairobi purchases a commercial oven for KES 350,000 to increase production and serve more customers.
The oven is expected to support the business for several years, making it a potential capital expenditure.
Here is how the bakery can manage this investment:
- Purchase cost: KES 350,000
- Purpose: Increase production capacity and improve efficiency.
- Expected benefit: Produce more baked goods, reduce production delays, and support business growth.
- Financial planning: Set aside funds or arrange suitable financing without disrupting daily operations.
- Record keeping: Retain the supplier’s invoice, proof of payment, and asset details for accounting purposes.
What Happens After the Purchase?
Rather than treating the entire cost as an ordinary daily operating expense, the bakery would generally record the oven as a business asset and account for its cost over its useful life, subject to the applicable accounting standards.
For illustration, if the oven has an estimated useful life of five years and no residual value, straight-line depreciation would be:
KES 350,000 รท 5 years = KES 70,000 per year.
This means the bakery would recognise KES 70,000 in annual depreciation expense under this simplified example. The actual accounting treatment and tax deductions may differ depending on the applicable rules.
The takeaway: CAPEX helps businesses invest in assets that support long-term growth while maintaining proper budgets, financial records, and accountability.
