See how capital expenditures and operating expenses are classified and affect your books.

When you become a business owner, you need to become fluent in accounting terms. Certainly you know what an expense is, but do you know the difference between a capital expenditure and an operating expense? This quick overview explains each.

What is CapEx?

Capital expenditures, also called CapEx, are significant investments in things that will benefit the company longer than one year. Typically, this means physical assets like buildings, equipment and vehicles. CapEx can also apply to things like patents, trademarks and technology upgrades, as well as research and development.

Investment in capital expenditures is often used to increase capacity, market share and competitiveness as a part of a company’s long-term planning. Often, when buying commercial real estate or buying equipment, businesses finance their purchases with loans.

What is OpEx?

Operating expenses, called OpEx for short, are day-to-day business expenses. The benefit of these items is short-term, meaning less than one year. OpEx often includes recurring costs like marketing, property taxes, expenses, payroll, utilities, insurance and supplies.

Accounting for CapEx and OpEx

Capital expenditures are reported as assets on a company’s balance sheet. They’re also depreciated over the course of the item’s useful life. (Land, however, is an asset that is not depreciated.) The long-term treatment of CapEx items means they are included in the financials beyond one accounting cycle, and the tax benefits are spread over multiple years.

OpEx show up on the company’s income statement. They’re fully expensed in the period they’re incurred. You also get the tax benefits of OpEx in the tax year they’re incurred.

Due to their short-term nature, OpEx allows flexibility when spending needs to be quickly adjusted.

In a nutshell, the CapEx category is for big-ticket investments that benefit the business longer than one year while OpEx covers short-term items that keep the business going day-to-day and benefit the business for less than one year.

 

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