Capex vs Opex

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Difference Between Capex and Opex

Capex is known as capital expenditure, whereas Opex is the operational expenditure.

Difference Between Capex and Opex

What is Capex?

Capital expenditure occurs when the company acquires new assets or adds some value to the existing ones, 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 to spread the asset's cost 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.
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 future benefits like the company's growth.

What is Opex?

Opex refers to those expenses that a business has to incur to run its daily operations. For example, the employees' wages, leases, maintenance and repair cost, etc.

Opex is 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 it 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 treating 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 a tangible or intangible asset. Intangible assets like patents are amortized, and tangible assets like buildings or equipment are depreciated over their lifespan.
On the other side, operating expenditure 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 makes. 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 used to transport goods for three years rather than buy them 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 hand, the entire amount of $150,000 paid to the vendor for the leasing is accounted for as an 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 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 an increase in net income that it can show to the investors. It will eventually increase the company's valuation and 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	It refers to those expenses that a business has to incur to run its 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 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
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-deductiblele.
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 some time through depreciation or amortization, depending on whether Capex is a tangible or intangible asset.

Opex is a short-term cost, and the expenses are fully tax-deductible. On the other hand, the operating expenditures represent the daily expenses necessary to keep the business going. Opex can be fully deducted in the same accounting period in which the items are purchased.