Difference Between Capex and Opex
Capex is known as the capital expenditure whereas Opex is the operational expenditure.
What is Capex?
Capital expenditure 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 a span of 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 is depreciated over the 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 which 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 may be 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.
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.
- Operating expenses are completely tax-deductible. Therefore it is more attractive for a company to lease an item and assign its cost to operating expenses rather than purchase it.
- This can be a financially attractive option for the company if the company has limited cash flow.
Capex vs Opex Infographics
Key Differences Between Capex and Opex
The key difference lies in the way these expenditures are treated in an income statement.
- As capital expenses involve the purchase of assets that have a useful life beyond the current accounting year, these expenses cannot be recovered in the year in which capital expenses are purchased. Instead, the assets are capitalized and either amortized or depreciated over the life of the assets depending on whether it is tangible or intangible assets. Intangible assets like patents are amortized and tangible assets like buildings or equipment’s are depreciated over their lifespan.
- Operating expenditure, on the other side, can be fully deducted in the current accounting year. By deducted it means, the operating expenses can be subtracted from the revenue when estimating the profit/loss of the company. As companies are usually taxed on the profit Operating expenditure make therefore the number of expenses you deduct will impact the tax one has to pay.
- From an income tax point of view, companies prefer Opex to Capex. For example, it is better to lease vehicles for 3 years which are used for transportation of goods rather than buying it for $150,000 per vehicle. Purchasing the vehicle will be accounted as a capital expense. The company will have to pay $150,000 upfront for the vehicle and the depreciation will occur say for a span of 10 years.
- On the other side, the entire amount of $150,000 paid to the vendor for the leasing is accounted as operating expense as it is a part of the daily business operations. The company can deduct the amount it has spent from the net taxable amount that year. The advantage is that it can be deducted from taxes that are levied upon the net income in that accounting year.
However tax deductible is not always the sole purpose for all the 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 a span of years. This 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 | ||
| Meaning | It 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 payment | The entire sum of money needs to be paid upfront | It is paid in monthly or annual installments. | ||
| Tenure | Long Term | Relatively shorter term | ||
| Profits | It is earned slowly and gradually | It is earned for a shorter period of time. | ||
| Examples | • Buying of fixed assets. • 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 |
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| How they are treated in the accounting period | Intangible assets are amortized whereas tangible assets are depreciated over their life cycle. | Their expenses are fully tax-deductible. | ||
| Preferable option in case of limited cash flow | An 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 company. | Leasing an item can be added to operating expenses and it is completely tax-deductible. | ||
| Synonyms | Capital Expenditure, Capital Expense | Operating Expense, Revenue Expenditure, and Operating Expenditure |
Conclusion
Capital expenditures are important 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 are tangible or intangible assets.
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.
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