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?....Please help
Muhammad's answer above summarises it neatly and I won't attempt to rephrase what he has already said.
But it may help you to know the implication is that once an expense is capitalised onto the balance sheet (eg as PP&E) it does not stay there forever. Over time, it will be depreciated over its useful life resulting in an annual expense charged to the income statement. PP&E and property are depreciated. Other assets are revalued or impaired. So eventually those cash outflows DO end up being expensed through the income statement in most cases.
Dear Saira
The financial statements capitalize PPE purchases and expense salaries and taxes in order to abide by the accounting matching principle.
Muhammad Farhan Basheer
I think it really depends on the skills of the manager or accountant to define the account classifications.
R&D department pays salaries to the engineers and expensed but the engineers’ work can be capitalized as intellectual property which can be valued and trade secrets which cannot.
The marketing department creates a name for the company and products and services which can be capitalized as goodwill.
The IP department’s work in trademarks and patents management can also be capitalized as intellectual property.
Yes, salaries are expensed but workers can create intellectual property and goodwill assets that can benefit the firm for many years.