Difference between Capex and Opex
Every day in our business valuations, operating expenditures like, capital expenditures (CAPEX) and operating expenses (OPEX) are commonly used. It represents two categories of business expenses. Likewise, there are distinct differences between the two and their respective tax treatments.
- CAPEX – Capital Expenditure
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.
Capital expenditures might include:
- Plant and equipment purchases;
- Building expansion and improvements;
- Hardware purchases, such as computers;
- Vehicles to transport goods.
2. OPEX – Operational Expenditure
Definition: 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).
Operational Expenditure include:
- Rent;
- Utilities;
- Salaries and pension plan contributions;
- Any expense considered sales, general, & administrative expenses or SG&A on the income statement;
- Research & development;
- Property taxes;
- Business travel.
3. Accounting treatment
Capital expenditures are cannot be fully deduced in the period when they were incurred. Tangible assets are depreciated and intangible assets are amortized at time.
Operating expenses are fully deducted in the accounting period during which they ere incurred.
4. The Bottom Line
Capital expenditures are major purchases that will be used in the future. The life of these purchases extends beyond the current accounting period in which they were purchased. Because these costs can only be recovered over time through depreciation, companies ordinarily budget for CAPEX purchases separately from preparing an operational budget.
The OPEX represent the other day-to-day expenses necessary to keep the business running. These are short-term costs and are used up in the same accounting period in which they were purchased.
5. Profits of Capex and Opex
Profits earned when a capital expenditure has been incurred occur in a slow and gradual process because the machinery will be operated by the organization for an extended period.
Although the profits earned by the organization after a capital expenditure are slow and gradual, they end up being more after accumulating after a lengthy period.
Incomes earned by costs incurred through operating expenses are achieved within a shorter period. Profits made using operating expenditure can be huge but are earned once unlike in capital expenditure where benefits are gradual.