What is Capital Addition
Capital addition is the cost involved for adding new assets or improving existing assets within a business. Capital additions may take the form of adding new parts or features that are expected to increase the useful life of potential of an asset, or may involve adding new assets to increase production or capacity. Repairs made to maintain the usefulness of a piece of equipment or an asset is merely maintenance and not a capital addition. Such distinctions are important to and commonly applied in capital budgeting and fixed asset accounting.
Breaking Down Capital Addition
Another way of describing a capital addition is that it is any investment that improves an existing fixed asset or results in the addition of a new fixed asset. As such, a capital addition makes a company or other entity's fixed asset base larger. Any other expenditure would entail a maintenance expense and would be charged that way on a balance sheet.
Although capital addition is most frequently used in the accounting context as seen above, it may be use in other ways. For example, capital addition may refer to capital investments in long-term assets within a company. In banking, capital addition may be used to describe an infusion of capital received by a banks to meet its reserve requirements so it may make additional investments or loans. Capital addition may also be used to describe the cost of improvements by a taxpayer to personal property (particularly real estate). Aspects of such improvements may be deductible.
Capital Addition in Insurance
In property insurance, a capital addition refers to how the insured value of a home or other property will need to be amended if a homeowner expands, extends or enlarges a property by renovation or with the addition of a feature, such as a larger deck or a swimming pool. Failure to account for a capital addition could lead to a property being underinsured, a shortfall in the replacement value and an insufficient maximum claim amount. Therefore when any capital addition is made on a property its owner should document it and report it to their insurer so that a policy may be updated. Most policies will have a capital addition clause that accounts for the possibility of a shortfall in coverage. Such provisions will generally limit coverage on capital additions to 15% of the insured value. They also tend to stipulate that the owner should report any increase in value on a quarterly basis.