Difference Between Capex and Opex
Capex is known as 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 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.
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.
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- Opex are entirely 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.
- It can be a financially attractive option for the company if the company has limited cash flow.
Capex vs. Opex Infographics
Let’s see the top differences between Capex vs. Opex.
Key Differences
The critical difference lies in the treatment of these expenditures in an income statement.
- As capital expenses involve the purchase of assets that have a useful life beyond the current accounting year, we cannot recover these expenses in the year in which capital expenses are purchased. Instead, we capitalize and either amortize or depreciate the asset over its life, depending on whether it is tangible or intangible assets. Intangible assets like patents are amortized, and tangible assets like buildings or equipment 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 over 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 for as a capital expense. The company will have to pay $150,000 upfront for the vehicle, and the depreciation will occur say for 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 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 | ||
| 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. | ||
| 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 entirely tax-deductible. | ||
| Synonyms | Capital Expenditure, Capital Expense | Operating Expense, Revenue Expenditure, 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 asset.
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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