A lot of merchants commonly mix up operating expenses and capital expenses. While the two relate in some areas, these two represent totally different things. An operating expense (OPEX) is an expense required for the day-to-day functioning of a business. On the other hand, a capital expense (CAPEX) is an expense a business incurs to create a benefit in the future. OPEX and CAPEX are treated completely different as it pertains to your accounting and taxes. We all know how important those are, so knowing how to properly calculate the two and what each represents is very important.
Let’s cover operating expenses first.
Operating expenses are going to be expenses that are incurred during the course of your daily business. Now, operating expenses can refer to both administration expenses, cost of goods sold, research and development (R&D) and general expenses. Since operating expenses are part of your day-to-day operation, they’re usually a lot easier to understand, conceptually speaking of course. All of your operating expenses should be recorded on your company’s income statement as expenses in the appropriate time frame they incurred.
OPEX cover a wide range of expense types, these can include;
- Property Insurance
- Property Taxes
- Utility Bills (Electric, Gas, Water, Sewer, Etc.)
- Office Supplies
- Travel Expenses
- Distribution Expenses
- Leased Equipment
Additional operating expenses could also include maintenance or general repairs of your existing fixed assets, which could be buildings or equipment. However, if the improvements are going to increase the useful life of the asset, it wouldn’t qualify as OPEX.
When it comes to operating the business, companies may have a choice if they wish to incur an operating expense or a capital expense. As a quick example, if a company would need more storage space for housing its data, it could invest in new data storage devices as a capital expense or it can lease space in a data center, which would be an operational expense.
A capital expenditure is incurred when a business spends money, uses collateral or takes on debt to either buy a new asset or add to the value of an existing asset with the expectation of receiving benefits for longer than a single tax season. Essentially, a capital expenditure represents an investment in the business.
Capital expenses should be recorded as assets on the balance sheet rather than as expenses on the income statement. The asset is then depreciated over the total life of the asset with a period depreciation expense charged to the company’s income statement, normally on a monthly. Accumulated depreciation is recorded on the company’s balance sheet as the summation of all depreciation expenses and it reduces the value of the asset over the life of that asset.
There’s a number of examples where capital expenses can be used, such as purchasing fixed assets, such as brand new buildings, new business equipment, upgrades to your existing facilities, even the acquisition of intangible assets such as patents can be a capital expense.
*Accelerated Analytics publishes resources like this to provide insights to different analytical metrics, data points and formulas. POS Analytics. Please be aware, this doesn’t mean that our product will this metric, data point or formula. To learn exactly what our reporting covers, please feel free to schedule a demo or give us a call. Thanks for understanding.