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. 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.
- OpexOpexOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit. 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.
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..
- 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 amortizedIntangible Assets Like Patents Are AmortizedAmortization of Intangible Assets refers to the method by which the cost of the company's various intangible assets (such as trademarks, goodwill, and patents) is expensed over a specific time period. This time frame is typically the expected life of the asset., 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 revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. 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 depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. 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
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. .
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 –