Capex vs Opex

Difference Between Capex and Opex

Capex is known as capital expenditure, whereas Opex is the operational expenditure.

What is Capex?

Capital expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more occurs when the company acquires new assets or adds some value to the existing one, which would be useful beyond the current financial year.

  • Capex or expenses are depreciated or amortized over the years. For example, it can buy equipment/ buildings or add value to an existing asset to upgrade beyond the current financial year.
  • Once the asset is put to use, it depreciates over a period of time to spread the cost of the asset over its useful span of life. Every year, a part of the asset is put to use.
  • Depreciation is the amount of depletion on the fixed asset, and the amount of depreciation that happens each year is used as a tax deduction.
  • Most often, capital expenses are mostly depreciated over a five to ten years period but sometimes maybe depreciated over twenty years in the case of real estate properties.
  • Capital expenditure is therefore used for a future benefit like for the growth of the company.

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What is Opex?

Opex refers to those expenses that a business has to incur to run the daily operations. For example, the wages of the employees, leases, maintenance and repair cost, etc.

Capex vs Opex

Capex vs. Opex Infographics

Let’s see the top differences between Capex vs. Opex.

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Key Differences

The critical difference lies in the treatment of these expenditures in an income statementAn Income StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements.read more.

However, tax deductible is not always the sole purpose for all companies. If a company wants to increase its earnings, it may opt for capital expenditure instead and only subtract a small part of it as an expense over the years. It will amount to a higher value of assets on its balance sheet and also an increase in net income that it can show to the investors. It will eventually increase the valuation of the company and also its stock price.

Capex vs. Opex Comparative Table

Basis of Comparison Capex               Opex
MeaningIt refers to the expenditure when a company either acquires new assets or upgrades an existing one in order.It refers to those expenses that a business has to incur to run the daily operations.
Way of paymentThe entire sum of money needs to be paid upfront.It is paid in monthly or annual installments.
TenureLong TermRelatively shorter term
ProfitsIt is earned slowly and gradually.It is earned for a shorter period.
ExamplesBuying of fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more.
• Expansion of buildings.
• Purchasing vehicles.
• Adding to the asset’s value through upgrading.
License fees
• Advertising costs
• Legal  fees
• Telephone and other overheads
• Insurance fees
Property taxation expenses
• Vehicle fuel and repair costs
• Leasing commissions
• Salary and wages
• Raw materials and supplies
How they are treated in the accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read moreIntangible assets are amortized, whereas tangible assets are depreciatedTangible Assets Are DepreciatedAny physical assets owned by a firm that can be quantified with reasonable ease and are used to carry out its business activities are defined as tangible assets. For example, a company's land, as well as any structures erected on it, furniture, machinery, and equipment.read more over their life cycle.Their expenses are fully tax-deductible.
Preferable option in case of limited cash flowAn item that can be bought through capital expenditure can also have its cost assigned to operating expenses if a company leases the item rather than purchasing it if there is limited cash flow in the companyCash Flow In The CompanyCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read moreCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read moreCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more.Leasing an item can be added to operating expenses, and it is entirely tax-deductible.
SynonymsCapital Expenditure, Capital ExpenseOperating Expense, Revenue ExpenditureRevenue ExpenditureRevenue expenditure refers to those costs incurred during regular business operations by the organization while availing its benefits in the same period. Such operating expenses include rent, utility expenses, salary, insurance expenses, etc.read more, and Operating Expenditure

Conclusion

Capital expenditures are essential purchases that will be utilized in the future. The lifespan of these purchases goes beyond the current financial period in which the assets are purchased. These costs can only be recovered over a span of time through depreciation or amortization, depending on whether Capex is a tangible or intangible assetIntangible AssetIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. read more.

On the other hand, the operating expenditures represent the daily expenses necessary to keep the business going. Opex is short-term costs, and the expenses are fully tax-deductible. Opex can be fully deducted in the same accounting period in which the items are purchased.

This article has been a guide to Capex vs. Opex. Here we discuss the top difference between Capex and Opex along with infographics and comparison table. You may also have a look at the following articles –

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  1. vector says

    Nice Explanation