Capex vs Opex
Capex (or Capital Expenditure) is a business expense incurred to create future benefit i.e. acquisition of assets that will have a useful life beyond the tax year. e.g. expenditure on assets like building, machinery, equipment or upgrading existing facilities so thier value as an asset increases.
On the other hand, those expenditures required for the day-to-day functioning of the business, like wages, utilities, maintenance and repairs fall under the category of Opex (operational expenditure). Opex is the money the business spends in order to turn inventory into throughput. Operating expenses also include depreciation of plants and machinery which are used in the production process.
|Improve this chart||Capex||Opex|
|Definition:||Capital expenditures are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing asset with a useful life that extends beyond the tax year.||OpEx (Operational expenditure) refers to expenses incurred in the course of ordinary business, such as sales, general and administrative expenses (and excluding cost of goods sold - or COGS, taxes, depreciation and interest).|
|Also known as:||Capital Expenditure, Capital Expense||Operating Expense, Operating Expenditure, Revenue Expenditure|
|Accounting treatment:||Cannot be fully deducted in the period when they were incurred. Tangible assets are depreciated and intangible assets are amortized over time.||Operating expenses are fully deducted in the accounting period during which they were incurred.|
|In throughput accounting:||Money spent on inventory falls under capex.||The money spent turning inventory into throughput is opex.|
|In real estate:||Costs incurred for buying the income producing property.||Costs associated with the operation and maintenance of an income producing property.|
|Examples:||Buying machinery and other equipment, acquiring intellectual property assets like patents.||Wages, maintenance and repair of machinery, utilities, rent, SG&A expenses|
Capital expenditures include acquiring fixed assets (tangible, e.g. machinery or intangible e.g. patents), fixing problems with an asset, preparing an asset to be used in business, restoring property so that value is added, or adapting it to a new or different use.
Operating expenditures include license fees, maintenance and repairs, advertising, office expenses, supplies, attorney fees and legal fees, utilities such as telephone, insurance, property management, property taxes, travel and vehicle expenses, leasing commissions, salary and wages, raw materials.
edit Accounting for Capex and Opex
The crux of the matter lies in the way these expenditures are accounted in an income statement.
Since capital expenses acquire assets that have a useful life beyond the tax year, these expenses cannot be fully deducted in the year in which they are incurred. Instead, they are capitalized and either amortized or depreciated over the life of the asset. Intangible assets like intellectual property (e.g. patents) are amortized and tangible assets like equipment are depreciated over their lifespan.
Operating expenditure, on the other hand, can be fully deducted. "Deducted" means subtracted from the revenue when calculating the profit/loss of the business. Most companies are taxed on the profit that they make; so what expenses you deduct impacts your tax bill.
edit What is preferred: Capex or Opex?
From an income tax perspectives, businesses typically prefer OpEx to CapEx. For example, rather than buy laptops and computers outright for $800 apiece, a business may prefer to lease it from a vendor for $300 apiece for 3 years. This is because buying equipment is a capital expense. So even though the company pays $800 upfront for the equipment, it can only deduct about $250 as an expense in that year.
On the other hand, the entire amount of $300 paid to the vendor for leasing is operating expense because it was incurred as part of the day-to-day business operations. The company can, therefore, rightfully deduct the cash it spent that year.
The advantage of being able to deduct expenses is that it reduces income tax, which is levied on net income. Another advantage is the time value of money i.e. if your cost of capital is 5% then saving $100 in taxes this year is better than saving $104 in taxes next year.
However, tax may not be the only consideration. If a public company wants to boost its earnings and book value, it may opt to make a capital expense and only deduct a small portion of it as an expense. This will result in a higher value of assets on its balance sheet as well as a higher net income that it can report to investors.
Operating expenses are sometimes also called Revenue Expenditure. Here are some videos comparing capital and operational expenses.
edit See Also
- GAAP vs IFRS
- Amortization vs Depreciation
- Income vs Revenue
- Financial Accounting vs Management Accounting
- Economics vs Finance
- Accounts Payable vs Accounts Receivable
- FIFO vs LIFO
- Common Stock vs Preferred Stock
- Standard vs Itemized Deduction
- AR vs. PO Financing