What is Capex vs. Opex?
The distinction between Capex vs. Opex comes down to the intent behind the spending and the timing of the resulting benefits, which has broad implications on the recognition policies per accrual accounting guidelines.
Capex vs. Opex: What is the Difference?
The term Capex stands for “Capital Expenditures”, while Opex is an abbreviation for “Operating Expenses”.
- Capital Expenditures (Capex) → The capital expenditures of a company describe the purchase of fixed assets (PP&E), in which the acquired asset is expected to provide economic utility for a period in excess of twelve months. Therefore, such purchases are often perceived as long-term investments.
- Operating Expenses (Opex) → The operating expenses of a company are the day-to-day costs incurred from the ordinary course of business, wherein the benefit from the spending is received in the same period. For instance, a sales and marketing campaign is deemed to be near-term spending, since the positive impact on revenue (the “top line”) should occur within the next twelve months.
Capital expenditures (Capex) are usually the most significant cash outflow for practically all companies, and the purchased fixed assets represent the business model’s core strategies to facilitate and support future long-term growth. Therefore, due to the magnitude of the spending and the long-term ramifications, the purchase of the fixed assets (PP&E) is periodic rather than constant.
In contrast, operating expenses (Opex) are incurred on a continuous basis and represent the ongoing costs necessary for business operations to continue running. Thus, companies must continually budget for these sorts of expenses and plan how to allocate the spending, with constant monitoring and frequent internal adjustments.
Capital Expenditures vs. Operating Expenses: Examples
The following list contains common examples of fixed assets purchased via capital expenditures (Capex):
- Property → Offices and Buildings
- Equipment → Machinery, Tools, Furniture, Lighting Fixtures
- Transportation Vehicles → Cars and Trucks
- Hardware → Computers, Work Laptops, and Phones
- Software → CRM, CMS, ERP, and Cybersecurity Applications
On the other hand, the following are common examples of operating expenses (Opex) incurred by a company from its day-to-day operations.
- Selling Costs → Sales and Marketing (S&M), Advertising Spend, Travel Expenses and Reimbursements, Transportation Costs
- General Costs → Rental Costs (e.g. Office Rent, Equipment Rental Fees), Utility Bills, Insurance, Office Supplies, Overhead Costs (e.g. Lighting, Wi-Fi, Telephone Bills)
- Administrative Costs → Employee Wages, Accounting Staff, Human Resources (HR), Technology (IT) Staff, 3rd Party Fees (Legal, Consultants, Advisory)
- Research and Development (R&D) → Spending on Product Improvements, Introduction of New Offerings, Internal Product, Market, and Customer Research
Capex vs. Opex: Accounting Policies
The distinct feature of capital expenditures (Capex)—i.e. that the purchased fixed asset has long-term benefits (> 12 months)—results in differences in the accounting treatment on the financial statements.
- Income Statement (I/S) → On the income statement, the purchase of the fixed asset is capitalized and expensed in the form of depreciation in an effort to recognize an expense in the same period as the period in which the coinciding benefit was received, rather than as a one-time, immediate cash outflow on the date incurred. In effect, the recognition of the capital expenditure is spread across the useful life of the fixed asset, which is the estimated number of periods in which the asset is anticipated to be capable of producing economic benefits.
- Balance Sheet (B/S) → On the balance sheet, the depreciation expense recognized on the income statement gradually reduces the carrying value of the fixed asset (PP&E) over the course of the fixed asset’s useful life.
- Cash Flow Statement (CFS) → On the cash flow statement, the entire outflow of cash related to the capital expenditure is captured in the cash flow from investing (CFI) section, with the depreciation expense treated as a non-cash add-back in the cash flow from operations (CFO) section because there was no actual movement of cash, i.e. the real outflow had occurred on the date of the initial fixed asset purchase.
Capex vs. Opex: Capitalize or Expense
While capital expenditures must be capitalized per accrual accounting standards, operating expenses are recognized straight away in the current period.
- Capex → “Capitalize”: The capitalization of an expenditure refers to the creation of a non-current asset on the balance sheet and the gradual reduction of its carrying value via either depreciation or amortization expense. Since the outflow was capitalized on the income statement (i.e. recognized across the fixed asset’s useful life), the presentation of a company’s financial statements is far more stable. If the entirety of the Capex spending was recognized in the period of actual occurrence, the company’s operating performance (e.g. profit margins) would be inconsistent and distorted by the one-time fixed asset purchases.
- Opex → “Expense”: In the case of operating expenses, no accounting adjustments related to matching the timing of the cost and the benefit are required. Thus, the period in which the operating expense was incurred is when the expense appears on the income statement.